Improving the Financial Curb Appeal of Your Pharmacy
By Bill LaRose, R.Ph |
The housecleaning part of the process seems straightforward—making physical improvements to the interior and exterior of the store—but there’s a lot more to it than you might think. You’ll also need to assess your financial recordkeeping and address shortcomings so that any potential buyer would have a clear picture of why they would want to buy your business.
In short, you’ll need to definitively show the buyer how they’re going to earn a living, cover expenses, pay off any debt service and still have some money left over to invest back into the pharmacy for future growth.
Here’s what you should do from a financial standpoint to maximize the value of your pharmacy in the buyer’s eyes.
Gathering historical numbers
Whether working with a pharmacy acquisition advisor, broker, consultant or financial institution, you’ll need to pull together three years’ worth of the following records:
- Tax returns
- Profit-and-loss (P&L) statements
- Balance sheets
- Prescription summary reports
- Third-party plan summaries
In addition, be prepared to provide a snapshot of your pharmacy’s performance for the current fiscal year to date. For example, assuming a calendar fiscal year, if you were looking to sell this month, you’d need to produce full records for 2019, 2018 and 2017, plus at least a pharmacy P&L and prescription report through the current date in January 2020.Bear in mind, too, that some buyers may want more information, such as the top 100 drugs dispensed by your pharmacy in the previous year. And, in light of the ongoing nationwide opioid crisis, buyers may ask for reports to show controlled drugs dispensed as well.
Factoring in “add-backs”
Aside from the pharmacy financial and operational reports just discussed, you’ll also need to consider one-time and owner-discretionary expenses. In other words, you may have used business income to make improvements or you may have legally billed off certain personal expenses to the store. Those amounts otherwise would have flowed to your bottom line, so they actually contribute to the store’s true value. They should be identified and added back to come up with your adjusted cash flow.One-time expenses include improvements you wouldn’t expect to reoccur year after year. For instance, you might have added a room within your pharmacy to administer flu shots and other patient care services and, in the process, accrued construction costs and legal fees to ensure permit compliance. Another example would be expenses incurred to gain certification as a compounding pharmacy.
Owner-discretionary expenses commonly billed to the store are payments for personal cars (along with fuel and insurance), mobile devices, home goods and staff entertainment, such as a holiday party. In some cases, pharmacy principals own their building and charge themselves above-market rent. Likewise, an owner may take a salary not commensurate with hours actually worked in the pharmacy. In the latter two situations, the discretionary expense would be the difference between the amount charged and the current market rate or salary. The key point here is that the prospective buyer may decide not to incur these types of expenses, so the amounts must be added to the adjusted cash flow to derive the actual value of the store. In essence, you are showing the buyer more money that he or she can put into their pocket.
Getting your store in order
Once you’ve addressed your recordkeeping and determined an accurate cash flow level, a few more actions will help you maximize pharmacy value. Direct your attention to these areas:
Take outdated or overstocked products off the shelves and return them for credit.
Analyze whether staffing levels match up with services provided. If your technician is getting ready to go off to college, do you really need to replace them with a full-time equivalent?
Can you get merchandise with same- or next-day delivery? If so, you probably don’t need to continuously carry three bottles of every medication.
- Physical condition of
Clean windows in the front end. Make sure displays are up to date. Sweep the floors and dust the shelves to make everything presentable. View the building from the outside to make sure all signage is operable and accurate.
Preparing for questionsGranted, there’s a lot of work involved in getting your pharmacy ready for market, but it all goes toward the desired result of securing the best price for your business.
As you approach face-to-face negotiations, expect some probing questions from the buyer, who’s also seeking their own optimal outcome. A buyer may notice that gross margin was down by three points from 2018 through 2019. Why would that be? Additionally, he or she will likely want to hear your evaluation of the store’s prospects for growth.
Don’t take those types of inquiries as an indictment against you and how you’ve run the business. Instead, recognize that the buyer just wants insight into your strengths and perceived weaknesses. Be prepared with honest answers, which may be as simple as explaining that you never explored compounding, long-term care or other opportunities that could potentially drive new customers into the store and boost revenue.
Ultimately, it’s only possible to sell a pharmacy for its highest value once you’ve gotten your house in order, so the time you devote to straightening out your pharmacy financials ahead of time will be well worth the effort in the end.