Periodic insights from our Investment and Private Client Teams on a broad range of investment and advice-related topics
Published in “The Pharmacists’ Guide to Selling Their Business” and written by Mike Jaczko, Partner & Portfolio Manager of KJ Harrison Investors, and Max Beairsto, Founder of Evcor.
As a pharmacy owner, it is important to adopt the right mindset about your pharmacy business. It is understandable that when you are starting up and growing your business, you might be so wrapped up in day-to-day operational and financial issues that it is hard to see the big picture – that your pharmacy is an investment, and ideally, one that will help sustain you and your family after your professional life as a pharmacist comes to an end.
When looked at through the investment lens, the sale of your business – although a significant liquidity event, or at least one hopes so – is not the end of the story. Instead, it is simply a new and very different chapter in the “narrative” of your family’s wealth. And that chapter, at least in the broad outlines, should be written long before you sell your pharmacy.
The strategic wealth plan is not just a vital – and sometimes overlooked – part of your overall exit planning, but also informs the exit process itself. Many pharmacists begin the process of exiting their business by asking themselves, “When do I want to sell?” But before they can really answer, they need to contemplate a whole bunch of other questions: “When do I want to retire?” “What do I want to do in retirement?” “How much money do I need to maintain my desired lifestyle in retirement?” “How will I manage, grow and draw down on my nest egg in retirement?” “How and how much do I want to leave to my family or to philanthropic causes?” A robust strategic wealth plan can help you answer those and other questions. It is crucial to get started early and to ensure that the sale of your business is integrated into your long-term financial plan.
Your focus will shift from building and operating your business to protecting your newfound capital.
Before we delve further, we’d like to distinguish between a financial plan and a strategic wealth plan. A strategic wealth plan incorporates all the financial assets held by a family with the after-tax value estimates of a family business as well as real assets like income property, as an example. Many financial planners tend to focus on the certainty of financial assets with their modelling, and they often ignore other important and material assets and the modelling required to estimate the frictional costs associated with tax.
The Wealth Management Phases of Pharmacy Ownership
In the early stages of their ownership career, pharmacist-owners need to focus on running an efficient business that meets the needs of their patients and customers in the community they serve. The goal here is to improve the profitability of the business and therefore, ultimately, its value. While those just starting out are often most concerned with paying off their business mortgage loans, a host of day-to-day and longer-term issues can come into play, from deciding on the best banner and wholesale alternatives to partnering with other pharmacists to purchase more stores and expand the revenue base. Yet throughout, managing and improving operational efficiency
to maximize cash flow not only fortifies the owner’s ability to service their debts, but also maximizes the intrinsic value of the business. As the business matures and grows, tax planning and corporate structure re-engineering become important considerations.
In this phase, the pharmacist-owner has established their business and is earning surpluses. Concerns about paying off debt no longer apply. Typically, this phase begins when the owners hit their 50s or 60s, they are no longer as interested in expanding, and they are wondering how much longer they wish to operate at their current pace. They might have children who are thinking of joining the family business or junior partners looking to acquire an ownership stake. Ideally, owners have by this point organized their business so that they have surplus cash residing within tax-efficient corporate structures; managing and protecting those surpluses appropriately becomes a
focus. They are beginning to contemplate slowing down or retiring.
Transition into Retirement (Post-sale)
Everyone would like to think that after the sale of a profitable business, the former owner will be left with a generous enough nest egg to let them sail off into the figurative sunset of a happy, comfortable and prosperous retirement. Hopefully, if you follow the guidelines outlined in our book, the liquidity event that is the sale of your pharmacy will indeed provide a sizable return on your many years of hard work. Yet even if that turns out to be the case, in many ways the post-sale period can be when the hard part really begins.
As a business owner, you have probably enjoyed years of recurring cash flow – profitable pharmacies are really good at that! But once you sell the business, a large portion of your wealth will be tied up in a world of volatile and uncertain capital markets that tend to provide aperiodic returns. From a wealth management perspective, what is important to you quickly changes. Your focus will shift from building and operating your business to protecting your newfound capital. For entrepreneurs, this can be a strange and challenging landscape. Suddenly, you are subject to the vicissitudes of the economy and of the financial markets, and the long-term low-interest rate environment can be a headwind to the rate of return from your nest egg. To achieve your lifestyle dreams, it is important to re-calibrate your expectations and your priorities. As an entrepreneur, your wealth is created by “concentrating risk”; as an investor, your wealth is preserved by “diversifying risk.” Note the difference in mindset.
This is where strategic wealth planning begins to pay dividends, because if you have a plan, you already have figured out your goals and objectives and how you are going to realize them once your business has been sold. The plan will guide you and your family through a maze of issues, and it will provide a road map to proper asset allocation to protect your capital and earn a return on the fruits of your work. The plan will also identify the amount of risk measured by volatility that your investment advisor will be required to expose your finances to, in order to achieve the goals and objectives identified during the strategic wealth planning process.
We just referred to a wealth plan as a road map, but it should not be written in stone. Like real-life road systems, the realities of your financial situation will probably change over time, as new avenues of opportunity, alternate routes to your goals and sudden, hopefully temporary roadblocks present themselves. That is why it is important to think of a strategic wealth plan not just as a report, but as a process – something that will adapt to your circumstances as they evolve.
To learn more about the strategic wealth planning process and its relevance to your business exit, please contact us at email@example.com or order The Pharmacists’ Guide to Selling Their Business online at: https://www.evcor.com/the-pharmacists-guide-to-selling-their-business/