Retirement is a well-deserved finish line for pharmacists who have led a rewarding and successful career. However, as simple as the concept of retirement is, it’s usually never that simple in practice. This is especially true for pharmacy owners, who must consider and plan for the event years in advance.
Before officially handing the key to the next pharmacist in line – be it a relative, partner, or a qualified buyer – there are emotional, financial, and legal considerations to address and specific steps to take to ensure there’s a smooth transition.
When Is It Time for Succession Planning?
If you’re reading this, chances are, the best time for you to begin succession planning is now. It’s more common than it should be, for pharmacists to near retirement age and not have a succession strategy or retirement plan in place.
It’s also common to underestimate the amount of time it will take to prepare a pharmacy for succession. Every situation is different, so there’s no universal timeline, or timeframe, for succession planning. Still, it’s recommended to begin planning for retirement at least five years in advance, and ten years is not unheard of in other business settings. Planning far enough in advance can better guarantee a smooth transition to the successor, ensure financial goals are met, will allow for ample time to work through the process, and will ensure your retirement plan is successful.
Starting the Conversation About Succession
Before you talk to potential successors for your pharmacy, it’s important to have a conversation with yourself. Take time to figure out what you want to do, then develop a tentative plan and whom it will include. Also, consider the professionals you will include: Accountant, Attorney, and Financial Advisor.
If you don’t have a partner or a relative you want as a successor, this part of the process is muIt would help if your thoughted to think about when and how you will go about selling it and who will guide you in the sale of your pharmacy.
If you wish to have a successor, you must have a conversation where you discuss your plan and your expectations. While this may go smoothly, and the successor agrees without issue, it isn’t always the case. For example, if the successor is a partner of yours and they want a 10-year timeline for a buyout, while you want to retire in five years, then they will need to figure out how they can get the financing in time to take over your shares.
Regardless of your situation, start mapping out your goals and time frames now. Then it’s vital to have a conversation with your spouse, children, business partner, and future successor to start getting everyone on the same page. These conversations can be daunting, but make sure this conversation happens long before you want to retire.
How Long Does Succession Take?
The planning process for succession should occur over the course of years and certain actions may need to take place during those years to ensure a smooth succession. As for the brokerage aspect of succession and the actual change of ownership, it depends on the size of your operation and who you are working with.
This portion of the succession process can take weeks or even months. Everything must be documented appropriately and some sort of agreement must be drawn up. The larger your operation, or the more businesses you have, the more complicated this process becomes.
This isn’t something that will be finished in a week. In many instances, it can take weeks or months to find a professional you’re comfortable working with. Brokers, lawyers, and CPAs are all common partners for this process.
Whoever you choose, be aware of their experience level. If you choose an attorney who doesn’t do this often, the process can take a long time. If you work with a partner who does this all the time, it will go more smoothly.
What Do I Need to Know?
Here are a few general rules and tips for anyone beginning the succession planning process:
- Insurance: Life insurance plays 3 major roles in succession planning. #1 it should be put in place when you first become a business owner to help your family pay off any business debt and allow them to continue running the business after you pass. This will better help them prepare for the next steps, be it to continue to run the business or prepare to sell the business. #2 it can be a valuable resource to help buy out other partners. Naming a business partner as a beneficiary with an agreement they will “buy your shares” from your family can be extremely beneficial in the event of death before retirement. #3 Partners may want to consider taking out key man insurance policies on each other, this is a valuable item to help hire a new employee if the person who passes happened to be a key member of the pharmacy such as Pharmacist-in-Charge or Manager. Term life insurance will always be less expensive than whole life.
- Consider Operating Agreements: Unfortunately, tragedies do happen, but death isn’t the only tragedy to consider. In the event of a disability that prevents someone from working or a divorce where you or your partner have to buy out a spouse, having provisions in your operating agreement gives you a clear plan of action if one of the 3 D’s pops up: Death, Divorce, or Disability.
- Have a Plan for Generational Sales: You can’t just give your business to a relative or the IRS will be knocking on your door looking to collect a VERY large tax bill. Any generational sale will come with a hefty tax, but there are ways to minimize this issue. If you plan to give 50% of your business to your child, for example, you can give them 5% over 10 years and mentor them along the way. You can also have the successor buy you out once they have most shares; the buyout won’t be as large and the taxed amount will also be smaller.
- Think of Your Finances: If you retire before age 59 ½, you must wait to draw on your 401k. Ensure you have a financial plan to bridge the gap until you reach that age.
- Know Who Your Successor Is: Even if your successor is someone close to you, it’s important to be honest with yourself about whether they are the right person for the job. Make sure to select someone you can trust to run the business the way you established it.
How to Get Started
Once you have a plan in place, you will need some help; after all, paperwork does need to be done, items may need to be filed, and people need to be notified. If you want a smooth succession, it’s best to work with a partner who knows what they’re doing. We would recommend working with an estate planner or advisor to help make some of the broad plans.
For the details on transferring ownership or selling your business in the future, look no further than R.J. Hedges & Associates Sales & Acquisitions. It is very difficult to run your business while also managing the succession process at the same time. We take this difficult process off your hands so you can run your business and establish the line of succession without any worry.