Overview of the Pharmacy Acquisitions Market · Financial performance –turnover 2014 2013...

Overview of the Pharmacy Acquisitions Market

Stuart FitzgeraldDirector – Fitzgerald Power

Global M&A 2015

Executives M&A plans

59%

41%

Expect to pursue acquisitions in the next 12

months

Yes

No

Executives M&A plans

72%

28%

Are seeking bolt on acquisitions

Yes

No

Executives M&A plans

55%

45%

Have 3 or more deals in the pipeline

Yes

No

What is driving consolidation?

• Boardroom confidence

• Cheap debt

• Pressure to become more efficient

• Desire to keep pace with rivals

International pharmacy consolidation

International pharmacy consolidation

International pharmacy consolidation

Why are pharmacy chains consolidating?

• Strong liquidity in international chains

• Preference for acquisition strategies

Group ownership in pharmacy markets

Ire 26%

UK 61%

USA 63%

Number of pharmacies in Ireland

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Number of pharmacies in Ireland

2002 2015

New openings in Ireland 2015

28

Consolidation or fragmentation?

Changes of pharmacy ownership

2014 45

2015 92

Financial performance – turnover

2014 2013

Turnover €1,531,200 €1,600,000

Items – state 51,251 53,000

Items – private 13,044 12,000

Revenue per item €17.45 €18.38

Private fees €7.00 flat €7.00 flat

OTC/retail mark-up 50% 50%

Financial performance – profit drivers

2014 2013

Gross Profit €689,040 €720,000

GP %age 45% 45%

Generic penetration 85% 80%

Wages & salaries €285,000 €270,000

Rent €50,000 €50,000

Other overheads €72,500 €75,000

Earning vs. maintainable earnings

EBITDA

€281K

MEBITDA

€250K

What determines multiples?• Profile of the target pharmacy

• Revenue growth opportunity

• Local competition

• Local GP profile

• Culture

• Recent deals in the sector

Valuation multiples

Below 4.5: Low volume, revenue difficult to defend, secondary location

4.5 to 5: Mid-sized pharmacy, possibly in secondary location

5 to 6: High items, defendable turnover, possible growth / synergies

Above 6: Strong pharmacy, attractive location, competitive bid process

Indicative goodwill valuation

MEBITDA

€250K

MULTIPLE

5.5

VALUE €1.375M

Financing the deal

• €1.5 millionDeal price to

include net assets

• 1.5 times EBITDADebt cover

• 4.5 times EBITDALeverage

• 10 yearsTerm

Financing the deal

• 4.5%Assumed interest

• €1.125 millionBorrowing

• €139,912 annuallyLoan repayments

• €375K / 25% of deal priceCash required

The problem with predictions

The problem with predictions

“Stock prices have reached what looks like a permanently

high plateau” Irving Fisher, October 1929

The sustainability of current valuations

• Long term sector profit projections

• Competition in the bidding process

• Appetite of the banks

• Availability of alternative liquidity

Thank you

Stuart FitzgeraldDirector – Fitzgerald Power

Legal Issues in Pharmacy M&A

Barbara Kenny

William Fry

25 February 2016

Objectives

What does the Seller/Buyer want to get?

Is price everything?

Non-financial objectives

Seller’s role post sale

Is this the right buyer?

Preparation

Prepare early, agree timing

Advisers

Term sheet

Non-disclosure agreement

Due Diligence

Financial/Tax

Property

• leasehold or freehold?

• term of lease

• planning

Employees

• employment contracts

• history

• key employees

Contracts

• HSE

• change of control

Due Diligence

Regulatory

• Pharmacy Act registration

• Supervising Pharmacist

• PSI Inspections

• Co-location with doctors

• Data Protection

Intellectual Property

• Name/Brand

• Website

• IT systems

Litigation

• Any history

• Insurance claims history

Structure - Share Sale

– Sale of entire issued share capital of company

– Tax considerations

– Contracts/lease normally go with company

Seller

Buyer CoWF Pharmacy Limited

Shares

Structure – Asset Sale

• Pick and choose assets and liabilities

• Tax Considerations

• Property issues

• Employees – TUPE

• Contracts

Buyer CoWF Pharmacy Limited

Certain assets and liabilities

Consideration

Pre-Conditions to ContractDue Diligence

Competition and Consumer Protection Commission

Shareholder consent

3rd party consents (banks, grant bodies)

Employees

“MAC” clause

Purchase Price Options

• Payment in full at Completion

– cash, shares, discharge of liabilities

– capital gains tax clearance

• Deferred Consideration for SPA

– deferred consideration/earn-out

– escrow

– cash free/debt free adjustment

– working capital adjustment

Cash Free/Debt Free

€

• Agreed Consideration = 1,000,000

• Cash at Completion = 200,000

• Debt at Completion = (100,000)

• Adjusted Consideration 1,100,000

Working Capital Adjustment

€

• Agreed Consideration = 1,000,000

• Working Capital Assets = 150,000

– (stock, debtors, prepayments)

• Working Capital Liabilities = (140,000)

– (trade and other creditors,

accrued expenses)

• Adjusted Consideration = 1,010,000

Purchase Price

Completion Accounts

Locked Box

Retention for Warranty Claims

Purchase Price – Bank Funding

• Buyer should be a company

• Mortgage over all assets of Target

• Additional Security? Guarantee?

• Financial Assistance

– Summary Approvals Procedure

– Personal liability – get advice

IndemnitiesWarranties V

Warranties

Scope

every aspect of

the business

constitution and share

capital

accounts

tax

assetsliabilities

employees

pensions

compliance

Warranties• Disclosure Letter

– general disclosures

– specific disclosures

• Warrantors

– management shareholders

– financial investors and other shareholders?

Warranties• Limitations

– time (tax and non-tax claims)

– cap

– minimum threshold

– “several” or “joint and several”

– other standard limitations

– “awareness” qualification?

• Set-Off against consideration

• Tax Indemnity

Other Issues

• Restrictive Covenants

– time, territory and subject matter limits

• Debtor assistance

406666v2

Practical Tips

Prepare early

Consider “must haves” and

“deal breakers”

Retain control and keep all

strands moving

Agree negotiation

tactics

Close quickly

Keep calm!

Barbara Kenny Partner D: + 353 1 639 5146

E: barbara.kenny@williamfry.com

Thank you

WF16126518v1

A profiled approach to pharmacy acquisitions

SAM PATEL

Director – Day Lewis

Identifying targets

• Agents and brokers

• Own networks

• Direct mail

• Advertising

Filtering out the good and bad

Five minute filter:

• Items

• Counter turnover

• Opening hours

• Rent

• How far is it?

Approach to valuations

• Site visit – any skeletons in the closet?

• Building up a bottom-up P&L

– Adjustment for vendors’ salary and operating model?

– Will you add any services?

• Will it go up or down under your management?

• Adjust the multiple according to the risks

– Scripts locked in? Capture rate too high? “Magnet” effect?

– Doctors moving?

Assuring a smooth deal

• Have your funding ready in advance

• Each side to get advisers in place quickly

• Share deals – satisfy yourself on company’s tax situation

• Don’t let the lawyers do all the talking

Managing the takeover

• Reputation counts

• Making people comfortable

• Openness and transparency

• Training and support

Buying well

• Your reputation counts

• Buying off-market

• Build a relationship

• Find mutual wins

• Keep the legals light

• Explore different ownership models

Thank you

Tax, Structuring &

Financial Planning

Aspects

Deirdre Lyons

Tax & Wealth Structuring Specialist – Davy

Pre-Sale Planning for Pharmacies

1. How is my business positioned for a sale?

Key Questions

Legal?

My Pharmacy Ltd.

Commercial?

Tax? Valuation?

Co-shareholders

Do we want to

retire?

Kids’

education?

Future

ventures?

Can we afford to

retire?

Other financial commitments?

2. How am I / we positioned for the future?

Key Questions

My Pharmacy Ltd.

Elements of a good pre-sale strategy

Fit for purpose commercially

Flexible

Tax-efficient

Provisions for retirement

1. Prepare or update your financial plan.

2. Maximise pension funding

3. Ensure current structure is fit for purpose.

4. Be attentive to tax-reliefs which may be relevant on a

future sale.

4 Key Steps

Five to ten years out… what should I be doing?

Aims to help you identify and meet your financial goals

Step 1: Financial Plan

Lifestyle &

Protection

Investment

Strategy

Business Exit

Strategy

Business Exit Timeline

Pre-Sale

Sale

Post Sale

Income from

-Salary

-Dividends

-Other?

Fund pension

Income from

pension / investments

/other

Future Ventures?Ensure this happens

as tax-efficiently as

possible

Financial plan helps track finances when you sell

1. Tax-relief on individual and company contributions

2. Each owner / director spouse can build up a fund of €2M tax-efficiently

3. De-risking wealth from business

4. Tax-relief on income and gains on pension investments

Step 2: Maximise Pension Funding

Why?

Married couple, both spouses working in the business, currently have combined pension assets of c.€500,000. They each have 25 years of service in the pharmacy which they own and run together.

They have significant scope to build up their pension funds through a combination of personal and company contributions.

Starting Value €250,000

Allowable special contribution c.€950,000

Target Value on Retirement €2,000,000

Lump sum on retirement (Estimate) €440,000

Balance to ARF / annuity to help fund retirement €1,500,000

Annual Income assuming a 4% drawdown €60,000

Pension Funding Case Study

Source: Taxes Consolidation Act 1997 & Revenue Pensions Manual. Please note that figures are

estimates and are for illustrative purposes only.

How is the business currently structured?

Sole trade?

Roche

Pharmacy Ltd

Limited Company?Roche

Pharmacy

Ltd

Family

HoldCo

Holding Company?

Co-investors?

Step 3: Structuring the business for sale

It depends: No one size fits all

approach

Consider:

long-term plans

tax-treatment on sale

what a purchaser might want to buy

Advance planning and good

advice are key

Working together: all advisors

cooperating for benefit of client

Which structure is best?

1. Sole trade to limited company

My Pharmacy Ltd

Why?

Benefits of incorporation

More scope for pension funding

Share sale potentially more attractive to a buyer

How?

Potential relief from CGT and management Stamp Duty on transfer of trade into sole name

Some Structuring Options

2. Single Limited Company to Holding Company

My Pharmacy Ltd

My Pharmacy Ltd

Family

Hold Co

Why?

Pay dividends from TradeCo to HoldCo tax-free

Facilitate tax-free sale into HoldCo –provided certain conditions are met

Useful in a scenario with multiple shareholders

How?

Share-for-share exchange

Potential relief from CGT and stamp duty provided certain conditions are met

Some Structuring Options

3. Moving trade into new “clean” company

My Pharmacy Ltd New Co

Why?

Maybe more attractive to a potential

purchaser

Retain certain elements in ‘OldCo’ if desired

How?

Share-for-undertaking exchange

Potential relief from CGT and stamp duty provided certain conditions are met

Some Structuring Options

Basic Position CGT at 33%

Retirement Relief 0% rate of CGT Applies to proceeds up to €750k (or €500k if over

65)

10 year holding period

Working director for 10 years, full time working

director for 5 of those years

New 20% Rate of CGT 20% on amounts up to €1M gains Owned shares for 3 out of 5 years prior to disposal

Worked as manager / director for 3 of 5 years prior

to disposal

Min 5% shareholding

Sale into holding company

from trading company

Tax-free 12 month holding period

Various other conditions

Share buyback by company Income tax (52% / 55%) or CGT

(33%) where certain conditions

are met

Significant reduction of shareholding

For benefit of trade

Vendor unconnected after sale

Other Various other permutations depending on circumstances

Tax Treatment on Retirement

Source: Taxes Consolidation Act 1997. Rates correct as at February 2016.

1. Start early

2. Separate strategy for the

business and you personally

3. Bring it all together….in a plan

Key Actions

Questions?

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