You’ve put blood, sweat, and tears into your pharmacy business. You care about what you’ve built and the people you take care of. The last thing you want is for all your hard work and your relationships to dissolve after you retire, leave your business, or worse, pass away.
Succession planning ensures you leave your pharmacy in the hands of someone you trust, preserves your future, and protects your partners or family. Attorney Matthew D. Brehmer of Remley Law, S.C., defines succession planning as ″putting together a plan to make sure the transition of your business goes well in the future. It’s a comprehensive road map to make sure you successfully exit your business at some point.″
This definition includes a diverse set of circumstances, even though many business owners tend to define it narrowly. ″People often think it means, ‘Well when I want to retire or sell my business, this is the plan I need to have in place for that process,’″ Brehmer said. ″While that is true, there are other instances that can occur in life that require succession planning, too.”
The other instances are referred to as the five Ds: death, disability, divorce, disagreement, and distress. ″These are all things you likely do not choose or think will happen when they do. Getting that plan in place now helps you through that process.″
Many owners are hesitant to create a succession plan because it means confronting the most distressing possibilities. ″It does cover a number of scenarios and topics that maybe you don’t really want to talk about,″ Brehmer said. ″But going through the process now when it’s not a matter of concern is way more advantageous than having to think about it once something happens.″
Although owners may think they have plenty of time before they need to start thinking about succession, there is no better time than right now. ″The day you enter your business is the best time to start planning for your eventual exit,″ Brehmer said. ″Not only does it put a plan in place in the event one of these scenarios plays out, but it also helps maximize the value of your business.″
Creating a succession plan
A succession plan starts with your business’s foundational documents. These are articles of organization or articles of incorporation that register your business with the state. They also include an operating agreement or bylaws, depending on if you’re an LLC or a corporation. The documents cover governing rules for how your business is run, like whether you have annual meetings, how decisions are made, how your business is wound up, how distributions are handled, how you are taxed, and more.
″Those documents are really the foundation to your business,″ Brehmer said. ″It’s important to have them in place because they are what really protects your personal assets from your business.″
Once the foundational documents are settled, you can start to put together your buy-sell agreements, which outline what happens in the event one of the owners or partners wants to retire, wants to sell, passes away, or has a disagreement. You will likely need multiple agreements with specific instructions for different situations. ″How you handle those things might be the same across the board, or they might be different,″ Brehmer said.
The agreement might specify what happens in a 50/50 ownership if the two parties disagree. Is there a third party that you nominate ahead of time that would be the deciding factor? Do you go to mediation? Or arbitration? It may outline what happens if one party decides to get out of the business and sell their share for the interest. Do the other shareholders get first right of refusal to purchase it?
The 5 Ds
A succession plan will cover your business in the case of one of the five Ds.
For all cases, the agreement specifies how to determine the fair market value of the business. From there it would detail how to determine the value based on each scenario. For example, if there’s a divorce among the shared owners, you might apply a discount, such as 20 percent off fair market value. The agreement would also specify how often to conduct the valuation—every year, every five years, or only once the succession occurs, for example.
“How the valuation occurs dramatically affects how much you get and how much the company or your other partners have to pay,″ Brehmer said. ″If you plan ahead as to what you all agree on, that makes it much easier if someone wants to get out of the business.”
Once the value is decided, the agreement also determines how the payment will occur, such as all at once or over time. Let’s say the pharmacy owes money to a surviving spouse according to the agreement. It may not have enough to pay right away, so the agreement specifies the payment terms, such as a payment plan over 10 or 20 years.
Ultimately, you want every decision in place for every scenario so that when it’s time for succession, there’s a clear plan to follow. ″If there’s a disagreement between partners in the future and you don’t have a plan, it’s going to be really hard to figure out what you want to do with the company and how the company transitions or succeeds after you or with you,″ he said. ″If you make sure that all those terms are already agreed upon, you just follow what the agreements say.″
When developing these agreements, you should include not only all the stakeholders but also several different professionals. ″It’s more than just speaking with your business attorney or just your CPA or just your financial advisor,″ Brehmer said.″It is really important that all these people are involved in this conversation because you do need to consider all the different facets of succession planning.″
3 Legs of the Stool
Answer and align these three questions to create a succession plan ″that sets you and your business up for success after you sell your business,″ says attorney Matthew D. Brehmer, a certified exit planning advisor through the Exit Planning Institute, which teaches these ″three legs of the stool″ as a standard approach in exit strategy.
1. Business How do you maximize the value of this business?
2. Financial What do you need financially from the business to support yourself in the next chapter of your life?
3. Personal What does the next chapter of your life look like?
Most common mistakes
In Brehmer’s experience, not enough business owners make a succession plan. ″Every business owner enters their business out of passion and love,″ he said. ″But they don’t have the proper plan for how the succession of their business is going to happen.″
Without a succession plan, you’re subject to the default rules per your state’s statutes. That means the transfer of your business will land in the hands of the court, and your default beneficiaries will have to endure a six- to nine-month probate before your assets are transferred. If you don’t designate a beneficiary, things get complicated for different family situations.
If you have children from a prior marriage, for example, half of the business would go to your spouse and half to those children. ″It can get very messy, and obviously having a probate handle your business during that transition is very complicated with accounting and court filings,″ Brehmer said.
Another mistake is using boilerplate agreements, whether it’s the operating agreement, the bylaws, or the buy-sell agreement, often simply printed from the internet. ″That’s likely better than nothing, but it doesn’t take into account the individual circumstances that affect your business every day, so it’s important to make sure you go through the actual process and have a well-developed plan with your advisors.″
The most common mistake is waiting too long. ″You need to start thinking about how you’re going to maximize the value, so when you sell, you are in a position to sell,″ he said. ″There’s a very big difference between what we say is ‘owner readiness’ and ‘business readiness.’ Sometimes the owner is ready to exit their business, but their business isn’t ready for it. If you maximize value through a succession plan, why would you not want to do that from day one?″
From the Magazine
This article was published in our quarterly print magazine, which covers relevant topics in greater depth featuring leading experts in the industry. Subscribe to receive the quarterly print issue in your mailbox. All registered independent pharmacies in the U.S. are eligible to receive a free subscription.
More articles from the September 2021 issue:
- Is transitions of care a good business opportunity for pharmacy?
- These are the top trends in secondary purchasing
- New guidelines define pharmacist responsibilities and rights
- Millions are incarcerated–and they need meds
- An attorney’s guide to succession planning
- Pet medicine is making this pharmacy profitable
- An inside look at the opportunity of long-acting antipsychotic medications
- Essential merchandising tactics to increase retail sales
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