Pharmacy Sales Case Study
A client was looking to sell his pharmacy within a four year period.
The key issues were:
- Ensure the business was ready for the transition / sale to his son
- Have a fall back plan in case his son was unable or unwilling to proceed with the sale
- The proceeds from sale would make up the majority of the client’s retirement strategy. Therefore it was important to obtain a good price, minimise tax on sale and maximise contributions into Superannuation.
Due Diligence & Financial Reporting:
The first step was to prepare the pharmacy for sale by undertaking a due diligence, similar to what a prospective buyer’s accountant would undertake. From this task, the following areas were identified as key strategic areas to address:
- Financial & management reports were inadequate to extract data to be able to make important decisions during quarterly reviews. A new Point of Sale software was implemented, capturing front of shop & prescription sales. This provided more accurate information on sales, gross profit margins, stock management and stock theft, on a daily basis.
- Structural review by Succession Plus, Accountant & Family Wealth Advisor, focusing on:
- Tax minimisation;
- Asset protection;
- Wealth Strategy, with a view to maximising superannuation due to clients age
Result of review was formation of Family Trust & a Self Managed Super Fund.
- Strategic Review by Succession Plus, Accountant & Family Wealth Advisor, focusing on
- Ensuring all Leases, employer agreements and supplier agreements were in place.
- Improve Sales & Profitability of Chemist;
- Using new POS to manage inventory more effectively (reducing purchase price of stock and minimising stock theft)
- Using the POS to price stock more effectively, to ensure margins are maintained
- Use new POS to run marketing campaigns to drive sales
- Ensure tax on eventual sale of the Chemist would be minimised, utilising the small business exemptions on capital gains tax
- Strategy to manage surplus cash flow in the Chemist:
- Part used to reinvest in business to drive sales
- Part extracted from the business to build passive wealth outside the Chemist (Investment Property, Shares, Bonds and Cash). This was partly in Super and Partly in new Family Trust
- Formation of a Self Managed Super Fund to facilitate acquisition of the business real property. Also maximised contributions into Superannuation prior to sale. The client would be over 60 when business is sold, hence allowing him to draw a tax free pension from superannuation in retirement.
- Strategy to maximise contribution of sale proceeds from Chemist into Superannuation when business is sold, utilising exemptions on contribution limits.
- Personal risk review for the client and his children. It was identified that should any of his children suffer from an accident or illness resulting in permanent disability to one of his children, it would have a detrimental impact on his wealth (as he would be required to provide financial support). This was achieved by having each of the children’s superannuation fund their Life & TPD policies.
Result:
The client’s pharmacy sales increased by over 50% and Gross Profit margins increasing from 27.5% to 32.5% over the 4 year period.
The Pharmacy was now ready for an external sale, with strong systems; however the client decided to proceed with the sale to his son. The result being the son had a well run, strongly systemised business that would be easier to manage and run.
The sale enabled the client to minimise tax on the exit and increase contributions to Superannuation. The client then set up a tax free income stream from the Super Fund and moved forward with a comfortable retirement.
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