Disclosure Session Objectives RxLegacy Pharmacy Ownership ... · 6/8/2017 · POA to operate under...

RxLegacyPharmacy Ownership Overview

ACPE # 0130‐9999‐17‐074‐L04‐P&T Accredited for 2.5 CE Hours

June 8, 2017La Cantera Resort, San Antonio


Identify essential tasks in planning the purchase or sale of a pharmacy;

Explain how to engage in discussions with other parties in the pharmacy ownership process; and

Disclosure & Session Objectives

Amanda Fields is a paid employees of American Pharmacies. Conflict of interest: NoneLearning ObjectivesAt the end of this segment you will be able to:

Amanda Fields, APRx General [email protected] (preferred) | 877‐634‐5445

Pharmacy ownership program established in 2016 and powered by AmerisourceBergen

Sole objective: grow community pharmacy & strengthen the chain of independent ownership

Connects like‐minded buyers, sellers & pharmacy students Free resources, consultants & advice No exclusivity required All contacts & deliberations conducted in total confidence.


RxLegacy Addresses All Career Stages Longtime owners looking to retire/sell in short term

Experienced owners wanting to plan an exit strategy Owners wanting to expand/grow through purchasing Owners seeking a junior partner or investor/co‐owner Younger pharmacists seeking first ownership opportunity or

junior partnership Students exploring junior partnerships & future ownership


Team Role: Gather initial information & help establish goals Counsel best course of action throughout Match interested parties Advise/coach on discussions with other parties Obtain a meeting of the minds Provide ownership transition advice Interact with APRx sales team and other RxLegacy team

members to maintain momentum

RxLegacy Team Member Amanda Fields


Leads Pharmacy Ownership Program at AmerisourceBergen

Long history of brokerage success Advises both buyers & sellers Evaluation of pharmacy’s financials & operations Cash flow analysis Stellar financial intelligence specific to community

pharmacies

Team Member Charlie Le Bon


Pharmacy Ownership Consultant at AmerisourceBergen Pharmacist and pharmacy executive experience in chain

& community pharmacy Personally involved in the sale, purchase & acquisition of

more than 500 pharmacies Adept at reviewing financials, providing valuations,

matching interested parties, and advising them from start to finish

Team Member Bill LaRose


Managing Director at First Financial Bank Pharmacist and former pharmacy owner Expert financial counseling & resources Pharmacy‐specific financial expertise

Team Member Bob Graul


Pharmacy Transition StrategiesFor Buyers & SellersBill LaRose, AmerisourceBergen


Disclosure & Segment Objectives

Describe the ownership transition process & the roles of both buyers & sellers;

Identify the factors that influence pharmacy value in determining purchase price; and

Explain basic formulas & methodology for determining the selling price of a pharmacy.

Charlie Le Bon & Bill LaRose are paid employees of AmerisourceBergenConflict of interest: None

Learning ObjectivesAt the end of this segment you will be able to:

Charlie Le Bon, Director of Pharmacy [email protected] | 949.212.1788Bill LaRose, Pharmacy Ownership [email protected] | 201‐874‐9431


Bill LaRose ‐ Profile

Pharmacist: graduate of Philadelphia College of Pharmacy 28 years with CVS:

o Multi‐unit field ops at Zone, Region & Area levelso Specialty Pharmacyo Pharmacy Acquisitionso RE Development

Consulting Business (Acquisitions, Franchise Develop.) Joined ABDC as Pharmacy Ownership Consultant Involved in 500+ Pharmacy Transactions


Discussion Topics

Independent Pharmacy Today – Alive & Thriving Expectations for Selling / Buying a Pharmacy Transition Process Pharmacy Valuation – What’s the Store Worth? Structuring the Deal


Overview of the Marketplace(Independent Community Pharmacy Today)

About 22,400 Community Pharmacies in U.S. $81 Billion Marketplace Gross Margin = 20% ‐ 24% Average Annual Sales = $3.6 million

o 92% of Annual Sales (1.2 Billion Rxs) are “Pharmacy Sales”

o 200 scripts per day = 60,493 scripts annually on average


900 Pharmacies Transition a Year

45% of community pharmacies generate less than $2.4 million in gross sales per year

15% generate more than $6 million in gross sales per year 60% of owners are older than 55 Transition = sell to chain, independent or close doors 26% of independents have ownership in 2 or more stores 2/3 of all owners will transition over the next 10 years


One Day….

All Owners WILL Transition Out of Their Business

o By Choiceo By Circumstance


Do You Have an Exit Strategy?

5 – 10 years?2‐5 years?1‐2 years?


Sellers Must Have a Plan…..

Increase “Value” Create Team Get Educated Be prepared to answer…


What Makes a Pharmacy MORE Valuable?

Higher then average gross or net profits 25% gross margin, 10% or less payroll expense,

10% or more net income High volume, year‐over‐year growth trends Good record‐keeping Well‐managed & ‐trained staff Reasonable rent Modern, up‐to‐date pharmacy Solid business mix


What Makes a Pharmacy LESS Valuable?

Declining prescription counts, profits & margin Weak financial statements & poor record‐keeping Excessive rent Too many employees Poor workflow Out‐of‐date


What Is the Value of the Pharmacy?

Is it profitable? 3 key metrics: gross margin, labor expense and net

operating income Buyers are purchasing the ability to generate a future

economic return Any pharmacy is worth only what the bank is willing to

lend for its purchase


Value Continued……

Must be financeable and earn buyer(s) return on investment Allow debt repayment Lenders like to see a debt coverage ratio of 1.25 or higher Fair and equitable to both buyer & seller


Who are the Buyers?(More Buyers then Sellers)

First‐time pharmacy buyers; working at chain or independent (the “30‐something’s”)

Current owners looking to grow/expand through acquisition

Investment groups/ consortiums

Chains (National, Regional, Niche)


What Is the Time Frame to Buy?

Locating the right opportunityo Regiono Locationo Demographicso Identify a seller? Now what?o Approach, perform due

diligence and make an offer


Buyers Must Have a Plan….

Must Have:o Good credito Valid Pharmacist License (or

access to one)o Passion & Desire to Own a

Businesso Had a Great Mentoro Cash Available for Equityo Understanding of Financial

Performance & Benchmarking


Building an Acquisition Plan

What is the pharmacy worth?

Financially document and prove the value

Perform due diligence Submit an offer

o Letter of Intento Purchase and Sales

Agreemento Use the advice of

industry professionals?


Common Valuation Methods

1. % of Gross Sales (18% ‐ 25%)2. 1‐Year Gross Margin $ (20% ‐ 24% of sales)3. Multiple of Owner’s Discretionary Income

(2.5 to 3.5 X normalized EDITDA)4. Dollars per Annualized Scripts

($10 ‐ $15 per “retained” Script)5. ROI (generate a minimum of 10% cash on cash return on

your up‐front investment)


Performing a ValuationWhat do a buyer, accountant & lender need to review? 3 years of Profit and Loss Statements/Balance Sheets 3 years of Tax Returns Pharmacy Prescription Reports

o RX Sales Report (Scripts & Payers by Plan Code)o Top 100 Drugs Dispensedo Generic vs. Brand / New vs. Refillo Seller’s cost of goods (purchasing power)o Rebateso Ability to recast/normalize financial statements

accordingly for a new owner


The Buyer’s Role Execute Non‐Disclosure Agreement

o Keep all information completely confidential Convince Seller You Can Continue Legacy in Community

o Staff and patient continuity Obtain Financing & Funds to Complete Acquisition

o Credit | Collateral | Character | Competence | Cash Flow Perform & Coordinate All Duties Required of a Buyer

o Draft a purchase agreement (legal counsel)

o Complete wholesaler credit application

o Complete necessary licensing applications


The Seller’s Role

Justify the asking or purchase price Disclose all financial documentation, prescription infor‐

mation, and general business & operation information Demonstrate to the buyer that they will be able to earn a

pharmacist wage, pay their debt, build equity & grow long‐ term wealth

Seamless transition process (training period)


The Actual Transition

Letter of Intent or term sheet Asset purchase agreement or stock purchase agreement Buyer to obtain a lease or purchase real estate POA to operate under seller’s provider numbers Apply for necessary licenses: State Board, third‐party

contracting, DEA, NPI/NCPDP, NABP, Medicare & Medicaid Third‐party inventory counting service Employee transition strategy Transfer of funds (escrow or attorney or lender)


Typical Purchase Structure

Buyer purchases the assets of the businesso Goodwill (all intangibles)o Furniture, fixture equipment (tangible)o Covenant not to competeo Inventory

Buyer obtains financing (SBA pharmacy lenders) Buyer obtains working capital


Non‐Traditional Purchases

Seller‐Financed Transaction Stock Purchase Buy into Partnership Junior Partnership Purchase Files (typically asset purchase) Employee Stock Ownership Plan

o Pharmacy staff purchases the business


Sources of Financing

Wholesaler Finance Programo Shorter terms (5‐7 years)o Higher interest rates (7% ‐ 10%)o High downpayment

SBA Pharmacy Lenderso 10‐year termso Competitive rates (5% ‐ 6%)o Low downpayment


ExampleSales ‐ Pharmacy $ 3,410,404 Sales ‐ Front‐End $ 267,235 Sales ‐ Other $ ‐TOTAL GROSS SALES $ 3,677,639

COS ‐ Pharmacy $ 2,686,241 COS ‐ Front‐End $ 170,633 COS ‐ Other $ ‐TOTAL COST OF SALES $ 2,856,874 Cost of Sales % 77.7%

GROSS MARGIN $ $ 820,765 Gross Margin % 22.3%

TOTAL OPERATING EXPENSES $ 735,527 % of Revenue 20%

NET INCOME $ 85,238 % of Revenue 2%

ADJUSTED EBITDA $ 238,238 % of Revenue 6%

APPROXIMATE INVENTORY $ 515,000

Gross Sales $ 3,677,639

Low Value20% $ 747,212

Medium Value

22% $ 820,765 High Value

24% $ 894,318

EBITDA $ 238,238

Low Value2.5 $ 595,595

Medium value3 $ 714,714

High Value3.5 $ 833,833

Annual Rx's Filled 62,000

Low Value$12.24 $ 758,765

Medium value

$13.24 $ 820,765 High Value

$14.24 $ 882,765

Low ValueMethod's #1,#2,#3 $ 700,524 Medium ValueMethod's #1,#2,#3 $ 785,415 High ValueMethod's #1,#2,#3 $ 870,305


Pharmacy Financing

Topics How to Finance SBA 5 Cs of Banking Types of loans Example


Bob Graul, First Financial Bank

Identify types of loans available to pharmacy owners Explain the differences between conventional loans and Small Business Administration (SBA) loans Describe the application process for SBA loans to finance pharmacy acquisitions and start‐ups.

Disclosure & Learning Objectives


Bob Graul is a paid employee of First Financial BankConflict of interest: Employee of commercial pharmacy lender

Learning ObjectivesAt the end of this segment you will be able to:

Bob Graul, Managing Director, Professional Services Division, [email protected] | 775‐554‐8064

How to Finance

Private Equity Loans Commercial Bank Lending Wholesaler Loans SBA Loans


The Small Business Adminstration Founded in 1953 Four functions:

o Access to Capital (Business Financing)o Entrepreneurial Development (Education, Information,

Technical Assistance & Training)o Government Contracting (Federal Procurement)o Advocacy (Voice for Small Business)


The Small Business Administration

MissionThe U.S. Small Business Administration has delivered millions of loans, loan guarantees, contracts, counseling sessions & other forms of assistance to small businesses.


SBA Guaranteed Loan ProgramsDebt Financing

SBA does not directly lend money. SBA sets guidelines for loans; banks lend the money. SBA partners with lenders to guarantee repayment. The loan is a commercial loan structured according to SBA

requirements with an SBA guaranty Preferred Lender Participant –Some lenders are preferred

lender participants


7(a) Loan Program Eligibility

Use alternative financial resources, including personal assets, before seeking financial assistance.

Be able to demonstrate a need for the loan proceeds.

Use the funds for a sound business purpose.

Not be delinquent on any existing debt obligations to the U.S. government.


SBA Business Size Standards

Is your business consid‐ered “Small” by the SBA? You must be defined as

a small business when submitting a proposal for SBA financing.

SBA uses the North American Industry Classification System(NAICS) as the basis for its size standards.


SBA Size Standards

What is a Small Business Size Standard? Usually no. of employees or average annual receipts. For Pharmacies and Drug Stores (NAICS code 446110),

size standard is based on average annual gross income.

Size standard for Pharmacies & Drug Stores: $27,500,000.


SBA Lending

SBA fees – Borrower will pay a guarantee fee depending on the loan amount, usually rolled into the loan

Application Personal Financial

Statement Last three years of

personal tax returns


SBA Lending

AcquisitionsPharmacy Questionnaire Last three years of business tax returns and most recent financial statement

Start‐upBusiness Plan with 3‐year projections


The Five C’s of Banking

CHARACTER – Can you run the run the business? CREDIT – Generally looking for 700 score or better CASH FLOW

o Acquisition – Will historical cash flows support the business, the debt and pay you a reasonable pharmacist salary?

o Startup – Are the projections reasonable? Do they cover expenses, the debt and pay you a salary?

CAPITAL – Do you have some cash to bring to the table? COLLATERAL – Very important to a conventional lender; not as

important to a SBA lender


Types of Loans

Transition Start‐Up Working Capital (Expansion) File Buy Partner Buyout Refinance New Construction Commercial Real Estate Purchases


Example Pharmacy Acquisition

Total Sales: $4,000,000Cost of Goods Sold: $ 3,100,000Gross Profit: $ 900,000Interest Expense: $ 25,000Depreciation Expense: $ 55,000Amortization Expense: $ 15,000General Admin. Expenses: $ 655,000Owner’s Compensation: $ 160,000___________________________________Net Income: $ 85,000


Seller’s Discretionary Earnings multiplied by 2.5 equals Goodwill/Rx Files

Net Income: ($85,000 + Interest $25,000 + Depreciation $55,000 + Amortization $15,000 + Owner Salary $160,000) = $340,000

SDE = $340,000 x 2.5 = $850,000 + $350,000 (inventory) = $1,200,000 Total Purchase Price

Buyer’s Cash: $25,000 (2% of purchase price) Seller Financing: $275,000 (23% of purchase price) Bank Loan: $1,150,000 (includes 75% of purchase price,

working capital and loan fees and closing costs)

Pharmacy Acquisition (continued)


Panel Discussion With All Presenters


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Disclosure Session Objectives RxLegacy Pharmacy Ownership ... · 6/8/2017 · POA to operate under...

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