Key Considerations When Buying a Pharmacy Business

Purchasing a pharmacy can be lucrative in Toronto, Mississauga and other parts of the Great Toronto Area (GTA), but it comes with unique challenges and considerations. Understanding the transaction’s financial, legal, and operational aspects is crucial for a successful acquisition.

Here are the key factors to keep in mind:

1. Understanding the Financial Health

• Profitability: Review the pharmacy’s financial statements for at least the past three to five years. Focus on revenue trends, gross margins, and net income. Often, numbers alone will not tell you the whole story; you need to go behind the numbers. It is essential to understand what happened and, more importantly, why it happened. Assess whether past financial performance is a reliable indicator of future profitability.
• Cash Flow: A positive cash flow is critical to covering expenses such as rent, salaries, and replenishment. When reviewing the cash, you need to “normalize” it.

Normalization of cash flow involves adjusting a company’s financial statements to exclude non-recurring or unusual items, such as one-time gains, losses, or extraordinary expenses. The objective is to reflect the company’s ongoing operational cash flow. By eliminating these irregularities, normalization provides a more accurate representation of the business’s financial health, making it easier to evaluate its long-term sustainability and compare performance with peers. It’s beneficial for investors and analysts to assess a company’s economic stability and profitability.

• Debts and Liabilities: Be aware of outstanding loans, leases, or legal obligations tied to the business. When buying shares of a corporation, you must be mindful of unknown or hidden liabilities, such as future litigation for past events, reported income to the CRA, etc.

2. Valuation of the Pharmacy

• Conduct a professional valuation to determine the fair market value, including tangible assets (inventory, fixtures) and intangible assets (client database, goodwill).
• Assess the pharmacy location and competition in the area, as these significantly influence its value.

3. Licenses and Compliance

• Verifying the pharmacy’s operating licenses and compliance with regulations from the Ontario College of Pharmacists, CRA, or other governing bodies is essential.
• Ensure all necessary permits are transferable to you upon sale.
• As per the guidance of the Ontario College of Pharmacists, “acquiring an existing pharmacy in Ontario is equivalent to opening a new pharmacy and requires the issuance of a new certificate of accreditation.”. Make sure to refer to detailed guidance on the college website.
• Under the Ontario Business Corporations Act and the Regulated Health Professions Act, a pharmacy can be incorporated to operate as a Pharmacy Professional Corporation (PPC). PPCs have many benefits to consider when incorporating to buy your pharmacy. Please refer to our detailed articles on the benefits of incorporation and incorporation of medical professional corporations.

4. Contracts and Agreements

• Review agreements with suppliers, wholesalers, and insurance providers.
• Additional due diligence is required where real estate is involved, such as ensuring there are no outstanding taxes or liabilities. The property must comply with environmental and legal requirements. In the case of rental properties, it’s essential to review tax rates and rental agreements. Engaging a property lawyer is crucial in addressing such issues.
• Understand any existing employment contracts and whether you will have to retain existing employees after the sale. It is advisable to engage an employment lawyer when buying an existing business with employees.

5. Client Base and Prescription Volume

• Analyze prescription trends, recurring and other related revenue. Pharmacies rely heavily on their client base, so understanding retention rates and demographics is essential. Get the necessary information on the business, such as Inventory count, refill rates, new fill rates, average script prices, and top 50 drug sales.

6. Technological Infrastructure

• Review the pharmacy point-of-sale (POS) systems, inventory management, and digital platforms.
• Consider any investment needed to upgrade or modernize outdated systems.

7. Professional Guidance

• Work with an accountant and legal advisor experienced in pharmacy acquisitions to navigate the complexities of the transaction.
• Conduct a thorough due diligence process to uncover any hidden risks.

Buying Shares vs. Buying Assets: Key Considerations

One critical decision when purchasing a pharmacy business is whether to buy the company shares or its assets. One needs to be aware of the risks and rewards associated with each, as each approach has distinct legal, financial, and tax implications.

Buying Shares of the corporation

Ownership Transfer: You acquire the entire business, including its assets, liabilities, and legal obligations and become a new “shareholder” of the corporation while the corporation continues to operate “as usual.” If you buy the share, ensure you have a detailed share purchase agreement, protecting you and your business.

Pros:

• Simplicity: As discussed above, the business entity remains intact, so existing contracts, permits, and supplier agreements often transfer automatically.
• Tax Efficiency: Sellers prefer share sales as they may benefit from Canada’s lifetime capital gains exemption (LCGE). The LCGE lets a qualified small business corporation (QSBC) owner exempt up to about $1 million in capital gains when selling the corporation’s shares.

Cons:

• Liability Risks: As the new owner of the corporation, you inherit all liabilities, including hidden debts or legal issues. It is advisable to engage a lawyer to cover this risk and include representations and warranty clauses in the share purchase agreement.
• Since the buyer will assume the corporation’s ownership, it is recommended that the CRA’s account, tax filing status, notice of assessment, payroll, and other dues be carefully reviewed.
• Due Diligence Cost: Extra scrutiny is required to identify any potential risks tied to the company.

Buying Assets of the business

Ownership Transfer: You select specific assets to purchase, such as inventory, equipment, and goodwill, without assuming the company’s liabilities.

• Pros:
• Liability Protection: As a buyer of the business, you avoid taking on unknown debts or legal risks from the company.
• Depreciation Benefits: Since you pay the current market price of the assets purchased, these assets can be depreciated based on their current market value, offering future tax advantages.
• Cons:
• Complexity: Negotiations are often more detailed, and transferring contracts and licenses may require additional steps. At times, you need approval from the governing professional body as well.
• Tax Impact: The seller may face higher taxes, potentially affecting the negotiation process. Normally, buyers demand higher prices when they sell assets instead of shares.

Factors to Consider

• Tax Consequences: Evaluate the tax implications for both parties. Consulting an accountant can help structure the deal to minimize tax burdens.
• Risk Tolerance: If liability exposure is a concern, an asset purchase might be more appropriate, specifically from the buyer’s perspective of the business.
• Negotiation Flexibility: Discuss the seller’s preferences and motivations, as they can significantly impact the transaction structure.

Conclusion

Buying a pharmacy is an exciting and significant investment that can yield rewarding returns if approached with the right strategy.

From evaluating financial health to deciding between a share or asset purchase, careful planning and professional guidance are essential, and you must engage the right professional experts.

At Source Accounting, we specialize in helping entrepreneurs navigate complex business transactions. If you are considering purchasing a pharmacy in Toronto, Mississauga, or other parts of the GTA, let us discuss how we can help you achieve a smooth and successful acquisition.

Source Accounting Professional Corporation (CPA) is a trusted accounting firm in Mississauga, serving businesses across Toronto and the GTA. We offer corporate tax filing, bookkeeping, payroll solutions, and more. If you’re a business owner or professional—pharmacist, physician, realtor, or consultant—we can help with corporate tax planning and filing. Call us at 647-930-8130 to book a consultation!

Disclaimer: The above contents are provided for general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice, nor can it or should it be relied upon. Please contact/consult a qualified tax professional specific to your case.