Build efficiency into your pharmacy business in the Covid-19 era

Now that COVID-19 vaccinations are changing the landscape, it's time to take toll of your pharmacy's financial plan for the year.

Here are three strategies to consider in 2021:

1. Review all your contract renewals, if you're an owner

Failure to understand how a renewal works for a particular contract can lead to unintended consequences.

Automatic renewals are often seen in equipment lease and banner agreements. In today’s pharmacy business environment, a pharmacy could lose the ability to negotiate a fresh agreement at the end of the term because the agreement has automatically renewed. In the event that the agreement is automatically renewed for a further term, the pharmacy owner may miss the opportunity to renegotiate a banner agreement, or even walk away. Some banner agreements permit the pharmacy to terminate the banner agreement on relatively short notice, which can mitigate the impact of an automatic renewal.

Optional renewals are most often seen in occupancy leases. Rent for the renewal term is sometimes specified or can be subject to negotiation (failing agreement, the rent is often determined by arbitration). If the tenant fails to properly trigger the renewal, the landlord is free to set the rent without regard to any specified renewal rent or the threat of an arbitrator imposing rent. In such circumstances, the pharmacy owner tenant may have little or reduced negotiating power to strike a fair deal, or, if the lease specifies a favourable rental rate for the renewal period, the tenant may miss that opportunity.

In either case, recognition of the notice periods involved and taking appropriate action within those notice periods are the key to ensuring that you position your pharmacy business to its best advantage.

Pharmacy owners should review their contracts to understand the renewal mechanisms, think about what the best course of action will be – taking into account their circumstances – and create a reminder system to afford ample warning of impending notification to ensure they are not hit by a failure to comply with the requirements of the contracts. Retaining knowledgeable legal counsel with experience in the pharmacy industry is a must!

2. Make your kids part of your financial planning

Engage with your family and give them an opportunity to voice opinions and express concerns. Avoid treating a family discussion as a one-way lecture about the family legacy since that could send a negative message that their opinions and views are not valued. Expressing your wishes to your family is fair game, but don’t assume that your kids will buy in. Encourage them to ask questions, and listen to their concerns. You don’t necessarily have to agree with everything they say, but at least you’re listening!

Some pharmacy families we work with don’t have a problem talking to their kids about wealth, but they’re unsure about how or when they should initiate the conversation. Others welcome a hand in preparing and providing structure for a family meeting. There’s nothing wrong with an organized discussion, but most of the time, our knowledge of how wealth works (and how it affects our lives) happens spontaneously, as we navigate through life events that touch upon money and personal finance. Learn to make the most of these money moments. For example, a child’s wedding might be a good time to talk about transitioning wealth to the next generation. Similarly, the birth of a grandchild could be an excellent time to discuss wills and estate planning.

When it comes to transferring wealth from one generation to the other, you may have a firm view of what you want to accomplish. Carefully listen to your children as they may have ideas of their own. Taking a “my way or the highway” approach when it comes to passing on family assets could result in a recipe for resentment and hostility. The key word in family wealth is “family.” That means being open to feedback from family members and understanding that their ideas may differ from yours.

The frequency of family meetings is important. Treat family wealth communication with openness and be aware of the opportunity family dynamics present. Talk with well-seasoned wealth advisors who have walked in your shoes, so when the opportunity arises, you’re prepared and confident to engage your family.

Ideally, the conversation should be organic – something that grows, develops and evolves over the years to adapt to changing financial and family circumstances. Much like building your pharmacy practice, communication isn’t a 100-yard dash, it’s a marathon that requires a committed and methodical approach to succeed.

3. Take advantage of the Qualifying Small Business Exemption (QSBE)

 As a pharmacy owner, you may be aware that when you dispose of shares in your pharmacy business you could receive an exemption on all or a portion of the capital gains that ordinarily would be taxable. This is due to the Lifetime Capital Gains Exemption (LCGE), which states that for 2020, up to$883,384 of capital gains is exempt from taxation. This LCGE is available to individuals who are disposing of, or deemed to have disposed of Qualified Small Business Corporation (QSBC) shares.

For the shareholder of a small business corporation, this valuable benefit could reduce or eliminate the tax bill that otherwise would be payable upon the sale or succession of your pharmacy business. The important thing for pharmacy owners to understand is that in order for this benefit to come to fruition, some conditions must be met. It is essential that preparation be done well in advance for a future sale or business succession. In order for your pharmacy business to be considered a QSBC and therefore qualify for the QSBE, it must meet the following two conditions:

* Ownership of shares

The shares of a pharmacy business corporation must not have been owned by anyone other than the individual taxpayer or a related person during the 24 months immediately preceding the disposition.

* Use of corporate assets

Also, during this 24-month period, 50% or more of the fair market value of the corporate assets must have been used in an active business conducted primarily in Canada. An additional requirement is that at the time of the disposition (sale or upon death of shareholder), all or substantially all (defined as 90% by the Canada Revenue Agency) of the fair market value of the assets must have been used to produce active business income. Before the sale of a pharmacy business, experienced tax advisors take appropriate pre-emptive measures to ensure that the 90% rule is in place at the closing of the sale transaction. This usually involves a “purification” of the pharmacy corporation to distribute or transfer the non-business-related assets.

These are just a few of the many strategies available to help pharmacy owners with financial planning geared to pharmacists. It is vital to obtain professional advice when undertaking the appropriate planning.

Mike Jaczko, BSc. Phm, RPh, CIM®, FEA, a pharmacist by background, is a portfolio manager, partner and member of KJ Harrison Investors, a Toronto-based private investment management firm servicing individuals and families across Canada. For more information on this topic, email [email protected].

Max Beairsto, B.Sc. Pharm., MBA, CVA is a pharmacist and valuation analyst with Enterprise Valuators Corporation (EVCOR), an Edmonton-based business valuation firm that focuses on business valuations and sale advisory of small and mid-sized private companies. You can reach him at [email protected]