Did you know that more than half of the existing pharmacies in Australia have owners over 55 years of age?
With retirement on the horizon for so many pharmacy owners, we can expect an influx of changing hands in the coming decade. So how will this intergenerational transfer take place? And what does it mean for you – the current owner or the aspiring young pharmacist?
There are several different pharmacy exit strategies. You could sell your pharmacy outright, sell to an existing partner, merge with your opposition, pass onto a family member or develop a succession plan.
Today, we’re going to deep dive into succession planning.
What Is A Succession Plan?
A succession plan is where a younger pharmacist buys out the senior partner over a predetermined time frame. And with an increasing number of young pharmacists finding it difficult to break into ownership, gradually handing over the reins of the company through a succession plan is a great pathway to consider.
You see, it’s a win-win: The junior partner leaps into pharmacy ownership with the safety net of a mentor, and the senior partner gets to extract equity and improve their lifestyle.
It sounds straightforward in theory, but it’s a big decision. Perhaps the most difficult and least likely path out of all the exit strategies. But done well, it can result in a smooth and successful transition (more on that in a minute).
Things To Consider Before Jumping Feet First Into A Succession Plan
1. Ask yourself, are you partnership material?
As with any relationship, the first question for both parties to ask is “are you partnership material?” And if you’re a young pharmacist looking to become a partner, there are some simple ways you can become more appealing…
- Keep your options open and be flexible when looking to enter into a partnership
- Where possible, pay for your share (or a portion of it). This means you’re not solely relying on the equity partner for financing your share of the company.
- Understand that the right opportunity may not come to you, so be prepared to relocate if necessary.
- Develop and expand on your skills and areas of expertise.
- Have a proven track record of success – and showcase it.
- Work on your communication skills – a key element in partnership, business and customer service.
A quote from the booklet ‘Buying & Selling a Pharmacy’ produced by The Pharmacy Guild of Australia sums up why succession plans are such a weighty decision…
“The thing to be made clear is the equity partnership type of succession planning is that it is the seller’s equity in the business that is providing the security for the incoming partners’ purchase. The major disadvantage or disincentive of the equity partnership is that it exposes both partners and that risk needs to be clearly understood.”
This brings us to our next point…
2. Consider the risk
An essential part of the succession process is to disclose and consider the security implications. As the current owner, you may have little or no debt on the business. Consider if you are willing to use the equity in the business to finance the new partner.
3. Understand the complexity of the transaction
There’s a common assumption that succession plans are simple transactions that require little time or effort. This is quite far from the truth.
As a senior partner, you must ask yourself “is the net profit the business generates enough to sustain another pharmacist’s wage and service the new debt?” What’s also relevant is the number of steps or tranches in the buying process and over what time period.
It’s a complex transaction which deserves time and careful consideration.
4. Remember that the junior partner has options
The option to take up additional shares in the business lies entirely with the junior buyer. Therefore, if the buyer is unhappy with the price paid for a previous tranche or believes the process provides an unacceptably high debt compared to the value of the business, they may not choose to take up the next option.
As a result, the succession plan may hit a roadblock. Worst case, you may find yourself stuck in a partnership, unable to exit the business and kick back into retirement.
Therefore, it’s important to lay down the ground rules from the outset. Enter into a partnership agreement that clearly sets out the process for how the price is determined for the shares in the business at each stage of the buy-out. It must be fair, equitable, independent and importantly, financially achievable.
Need Help Developing A Succession Plan?
I have been facilitating partnerships for pharmacy owners and aspiring young pharmacists for close to a decade. At AP Group, we have a structured ‘Pharmacy Partnership Program’ which addresses the needs of both the current owners and aspiring pharmacists.
Are you a young pharmacist who ticks the boxes outlined above? Entering into a pharmacy succession plan can steer your career and life in a thrilling new direction – full of adventure, rewards and challenges. The opportunities are out there, you just need to connect with the right people. That’s where we come in, we would love to hear from you.
– Ian Fedrick, Partner and QLD Sales Manager at AP Group