The Five Phases of Selling a Pharmacy

If you have read our previous articles about the ins-and-outs of selling a pharmacy in Canada, then you already know that it can be a complicated process. And sometimes it can be daunting. But when you are considering putting up your pharmacy for sale, taking some time to understand the transaction process can take away the confusion – and the fear – of selling. At the very least, you will know what you are in for.

We have identified five basic steps or phases to the selling process. None of them are particularly complicated, at least on the surface. But bear a couple things in mind.

First, these steps should be done in order – you can’t skip over any of them and expect to have a successful transaction. And second, the advice and guidance of a trusted team of advisors is vital to getting it right and reducing the stress and friction that inevitably accompany such a significant personal, professional and financial event.

This is where it all starts. Ultimately, you will be negotiating with a prospective buyer over the value of your business. But before you get there, it helps immeasurably to have a strong understanding of what that value is. There are plenty of rules-of-thumb that business owners often use to guess at value, but there really is no substitute for a data- and experience-based estimate of your pharmacy’s market value by a qualified business valuation expert.

With a strong and evidence-backed understanding of value, you can enter negotiations with confidence and clear targets. Here, an experienced “quarterback” on your advisory team can make all the difference. They will be an active listener, skilled at corralling your other advisors (lawyers, accountants, etc.), committed to a “win-win” in negotiations and, perhaps most importantly, able to keep everybody’s eye on the prize: getting to a sale at a fair price.

Once you’ve established a solid valuation for your business, you enter the preparation phase. A smart buyer will pore over the details of your pharmacy during due diligence, and it is in your interests to have all your financial and legal records in good order. Doing so will not just make life easier for the buyer (although that’s not nothing!). It will also a) demonstrate that you are being transparent and professional, and b) keep the sale process moving along efficiently. Remember, time kills deals!

Another important part of the preparation phase is creating marketing materials for potential buyers, including a confidential information memorandum, or CIM. Typically, a CIM contains all the necessary and relevant information a buyer may need to evaluate a pharmacy. That includes detailed financial information (balance sheets, income statements), an overview of operations, staff and services, and often a description of demographics and other insights into the community the pharmacy serves. Prescription volume, margins, commercial terms and other key performance indicators should also be provided, along with guidance on pricing. A good transaction advisor might also want you to include a “blue sky” section in the CIM that outlines the pharmacy’s growth potential.

Also, good preparation involves working with your accounting and legal advisors to develop your preferred sale structure, including but not limited to whether it will be an asset or share sale. Doing this well ahead of marketing your pharmacy can give you time to make the needed adjustments to your corporate structure, assets and accounting practices to facilitate the kind of sale you want.

Finally, work with your transaction advisor to prepare a list of qualified buyers, and have your legal team draft a non-disclosure agreement (NDA) for potential suitors.

With your preparatory documents and targets completed, you are now ready to take your pharmacy to market. This is where a transaction advisor experienced in the pharmacy industry can be worth their weight in gold. They can help you reach out to qualified buyers and assess the opportunities. If you are lucky and your store is desirable, you can expect plenty of suitors, so make sure you have either the knowledge or the right advisor to help you separate the wheat from the chaff. And remember that assessing a buyer is not only about how much you think they are prepared to pay. The entity that ultimately takes over your store should be one that you are comfortable with, who you are relatively confident will maintain your values (and your customers loyalty!), and who won’t prove to be an embarrassment to you and your legacy in the community. We have seen many pharmacist sales leave the former owner bitter and disappointed simply because they chose the wrong buyer.

This phase begins once the potential buyer has made an offer (usually in the form of a Letter of Intent) that you consider generally acceptable. At this point, two processes run in parallel.

The first is confirmatory due diligence, which in essence is a deep dive into the business by the buyer, who will want to make sure that everything about the pharmacy is as you have represented it during the marketing/negotiation phase. Your selected buyer will review source documentation and request updates as needed. They may even choose to visit the store to confirm their due diligence. In some cases, especially when a corporate buyer is involved, they may undertake a “quality of earnings” review.

The second, and to the seller most important, part of this phase is the development of a definitive purchase agreement, or DPA. The DPA is a legal document that outlines the terms of a transaction between buyer and seller. It supplants the Letter of Intent and details the specifics of the purchase, such as price, legal descriptions, representations and warranties. The DPA will also stipulate whether the transaction is an asset sale or a share sale, each of which has its own advantages and disadvantages. (Most sellers prefer the latter, for reasons we will explain in another article.)

The DPA is typically the last step before closing the deal, and it must be executed by both parties. So it is crucial that your definitive purchase agreement is detailed, accurate and clear to avoid creating disputes and misunderstandings in future.

Finally, you and the buyer are ready to close – but your job isn’t done yet! Once you have completed all the paperwork and the transfer of funds has occurred, you will very likely need to provide ongoing support while transitioning ownership. Your DPA might, for instance, require you to continue working at the pharmacy for a defined period. Also, after closing financial statements are done, a post-closing adjustment to the purchase price is often required. Any holdbacks and earn-outs will still need to be settled at a later date, too.

If all the above five phases sound like they are a lot of work – well, they are!

Two important takeaways here: First, selling a pharmacy is a complicated business, and you will need help. So, start to think about your transition team – including accounting, legal, tax and transaction advisors – early on, and make sure they have the expertise and experience to really help you.

Second, there is absolutely no substitute for sound preparation. As soon as you begin to think about selling your pharmacy, educate yourself on the process, get your legal and financial documents in order, and fix any operational and/or governance issues.

With an understanding of the five phases of selling and a little bit of preparation, you can avoid a lot of hassle and plenty of headaches down the road.