Deciding When It's Time to Buy Pharmacy #2
If you have aspirations of owning multiple independent pharmacies, diverse pathways can lead you to your goal. You may be consistently churning out positive cash flow at your current store, positioning yourself to bid on attractive pharmacies for sale. Alternatively, sales and profitability at your store may have flattened out over time, so opportunities for expanding your pharmacy business lie beyond your original location.
Two real-world examples further illustrate the possibilities:
- An independent owner started up and ran a retail pharmacy, building a solid reputation based on 10 years of exceptional service to his community. Nonetheless, he wanted to enter new market segments and capture a wider patient base. He elected to purchase a store on the other side of town that had a fledgling compounding business. When sales from the acquired store grew exponentially, he decided to offer compounding at both locations. Existing patients loved the convenience of accessing compounding services at either location, while the expanded business model attracted new customers.
- Two former pharmacy school classmates each had full ownership in their respective stores. However, they both wanted to grow and determined that pooling their resources would yield the fastest result. They are currently pursuing a high-volume pharmacy opportunity and have solid lender support based on the performance of their existing stores as well as their combined liquid assets available for investment. They're also benefitting greatly from each other's perspective as they review pharmacy financial and dispensing reports during the due diligence phase of their acquisition. Even though they're still in the process of closing the deal, their collective competence gives them visions of expanding to a third, fourth and fifth store.
Things to consider when buying a second pharmacy
In each of these scenarios, you can see a common thread—owning multiple independent pharmacies requires flexibility and adaptation to changing circumstances without compromising on the delivery of quality care.
Let's run through the fundamentals of how to prepare for such a move.
Purchasing a second pharmacy is the quickest way an owner can grow their business. The ideal time to make this type of acquisition is when your current store is producing positive cash flow. Since few owners have enough liquid capital available to make an outright purchase of a second pharmacy, you'll likely need to explore other financing options, such as a business loan or enlisting the help of an investor. The amount of funding you receive will depend on the financial performance of your current store as well as the one you plan to buy.
What will a lender or investor be looking for? Cash flow is the most important consideration because it reflects your capability as an owner and manager in running a business. Lenders and investors typically analyze cash flow over a three-year period, verified by fiscal year tax returns. Cash flow should be trending upward for the stores on both ends of the proposed acquisition. Downward-trending cash flow at the either store would require deeper digging to find out why.
Liquidity (how fast your business could turn assets into cash) also comes into play. Keep in mind that you'll be required to make a down payment. Accordingly, the lender or investor will want to ensure that you can make that payment without depleting your entire savings.
After assessing your store's performance, a more qualitative evaluation comes next. You should be asking yourself why expanding your pharmacy business is important to you and whether you have the time and energy to do so.
Without a doubt, time management will be a significant challenge. Your current pharmacy should be self-sufficient enough so that you can step away from it to tend to the newly acquired store. Discuss expansion plans with your staff to make sure they’re onboard with the decision. You'll need to delegate responsibility at your primary store as the secondary store gains its financial and operational footing. Make sure you’re in position to succeed as a team. David Rziha, president of Mid-Kansas Pharmacy Management, which operates several pharmacies in central and eastern Kansas, recommends making an investment in trustworthy people on your staff because you literally can't be in two places at once.
Further, assemble an advisory team comprised of an accountant, an attorney, a lender and a consultant to guide you through planning and strategizing. Good pharmacy acquisition opportunities often attract intense competition from other potential buyers. In many cases, the seller prefers to move forward with a buyer who is not only well-qualified, but also capable of closing the transaction quickly. Having an advisory team in place signals to the seller that you're going to be responsive to any issues or questions. What's more, the team will help ensure that, before making an offer, you have a full understanding of the local market and community demographics, as well as existing or impending competition.
The current acquisition market
Independent pharmacy brokers and lenders report anecdotally that pharmacy acquisitions have slowed a bit during 2020 compared to 2019.
The ongoing COVID-19 pandemic has forced some pharmacy owners to sell sooner than anticipated, while others have paused operations due to uncertainty in business conditions. Also, in practical terms, many independent pharmacy owners have been too busy focusing on patient care and adjusting workflows and delivery schedules to consider a sale.
In addition, this year's tax-filing deadline extension from April 15 to July 15 has curtailed the sense of urgency that typically accompanies preparation of financial reports for pharmacy valuations. Under normal circumstances, pharmacy valuations would have been completed much earlier than is the case this year.
Fortunately though, the federal government has responded with a variety of coronavirus debt-relief programs to stimulate growth. In particular, we've seen some independent pharmacy buyers proceed with acquisition plans in order to benefit from the Small Business Administration's agreement to pay six months of principal, interest and associated fees for SBA Debt Relief loans disbursed before September 27, 2020.1 It remains to be seen whether the SBA program will be extended, but it's definitely worth exploring if you're considering a purchase.
Undoubtedly, acquiring additional pharmacies will add complexity to your life. As you grow a network of stores, you'll have to become a leader at the executive level rather than spending a lot of time in day-to-day operations like working on the bench. In essence, you'll be stepping out of the pharmacy and into the C suite. Nonetheless, in doing so, you'll be able to focus on the needs of the entire organization.
Overall, consider how owning multiple independent pharmacies would enable you to have a greater positive impact on your community by bringing successful programs and services to a broader audience. Share that frame of thinking with your team to get them inspired and invested in the decision to move forward. Then get connected with advisors who understand your aspirations and can help you find prospects that match your vision. Once you've aligned all those resources, you'll be ready when the right opportunity comes along.
Do your long-term goals involve acquiring additional pharmacies?
1. U.S. Small Business Administration. SBA Debt Relief. https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/sba-debt-relief