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Buying a pharmacy? Do your due diligence


When pharmacist Mark Scanlon purchased a small pharmacy in Peterborough, Ont., in December 2013, he was more prepared than most would-be entrepreneurs for the many challenges of ownership.

He knew the owner and many of his staff, he was familiar with the community, his father and grandfather had operated their own pharmacy, and perhaps most importantly, it was not Scanlon’s first foray into entrepreneurship: from 1989 to 2009 he had been part owner of another pharmacy in the central Ontario city.

But while he had most of his ducks lined up, Scanlon did plenty of homework before buying Mather & Bell IDA Pharmacy, which has been in business since 1962. He sought advice from independent experts and did long hours of due diligence to ensure the enterprise was the right fit and would be profitable over the long haul in a community saturated with pharmacies.

“It is vital to do your homework and it certainly helps to have the advice of trusted professionals,” says Scanlon, who assembled a team of experts, including Mike Jaczko, a partner and portfolio manager at Toronto investment firm KJ Harrison & Partners Inc., who advises independent pharmacy owners on buying and selling pharmacies, succession planning, wealth management and pharmacy valuation.

“Due diligence means you have to know the good things and the bad things you are buying,” says Scanlon.  “Are the bad things easily fixable, or will the store be a money sinkhole?”

Jaczko agrees. “You are asking for trouble if you buy without a clear and defined plan and do not do your homework. New owners often fail because they jump in prematurely and either buy a business that is not viable or buy without having the required emotional commitment.”

With the aid of Jaczko and an accountant, Scanlon analyzed the store’s financial statements and determined that its bottom line represented the business’s true earnings.

The pair closely examined the 1,400-sq. ft. store’s prescription volume and examined the position of the pharmacy in relation to the many other pharmacies in the area.

“There were no other independent stores in the immediate area, which I saw as a plus.  I was confident that preserving business and growing sales was achievable,” said Scanlon.

As a long-time resident of Peterborough, Scanlon was keenly aware of the state of the local economy.  Although a number of medium-sized companies had closed in recent years, and despite the fact there were more than 30 pharmacies in the community, Scanlon found census data indicating the city has one of the highest percentages of seniors of any Canadian community with a population in the 70,000 range. This information helped bolster his decision to seal the deal.

His research and knowledge of the city’s healthcare sector also showed that the business had a solid relationship with doctors and customers, and had been active in the community.

Because Scanlon knew the owner, the pharmacists and many other staff, he quickly determined he could step in and become part of the team in a way that would not ruffle feathers or slow the growth of the business.  No staff have left since he purchased the store.

As the new owner, Scanlon’s plan is based on a “steady as she goes” philosophy. “When I bought my first pharmacy, I started changing numerous things. One day a staff member took me aside and said, ‘Don’t forget that this was a good pharmacy before you got here.’  That will not happen this time.”

Mark Scanlon’s 7 top tips to buy right

#1. Ensure you have money in your pocket and access to credit. The typical value of a medium-sized pharmacy is more than $2 million.

#2. Draw up a business plan that charts your path to success, examine three to five years’ worth of financial statements and look for an upward trend in sales.

#3. Look to the right advisors – they should be able to put you in contact with people or institutions which can help you make pharmacy ownership possible.

#4. Find a location with plenty of parking and lots of car and foot traffic. If possible, they should be close to doctors’ offices and major retail outlets, like supermarkets and liquor stores.

#5. Visit the store as a secret shopper to get a sense of how the business is run. Messy parking lots, disorganized stock, and unfriendly staff might be key indicators.

#6. Analyze prescription data for government plans, third party plans, and cash scripts. This will give you a solid insight into the market the store serves.

#7. Ensure the pharmacy’s staff are open to a new owner and any changes you plan to implement. Customers will be loyal to the staff you are inheriting. If employees start disappearing from the public’s view, the public may disappear as well.

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