Tag Archive for: pharmacy valuation

Just as with so many other things in life, it takes two to buy a pharmacy. A buyer and a seller are the key ingredients. While brokers and lawyers help make sure everything is in the right measure and neither party gets burned, without a willing buyer and a motivated seller there is no deal.

While the buyer and seller may appear to be adversaries in a zero-sum game, in reality, they may have more in common than meets the eye:

Buyer and Seller Strategies When Buying or Selling a Pharmacy

Both the buyer and the seller want the company sold. Both want as painless a process as possible. Both want it over quickly. Neither wants to get very far into the deal and have it fall apart. Neither wants the word to get out that a deal is in process. And neither wants the business to fail.

With so much in common, how could anything go wrong? Simple: buyers and sellers speak different languages. Each is reading for different clues, deciphering vastly different nuances, viewing the whole process through a different set of lenses. And this is exactly as it should be. Friendly skepticism is the ideal in all transactions. Former American President Ronald Reagan used to chide the then Soviet Premier, Mikhail Gorbachev, with the phrase “trust, but verify.” The United States was willing to accept what the Russians said was true only after the United States had verified it to be true. As with nuclear warheads, the same is true for pharmacy purchases.

It goes without saying that the wants and needs of buyers and sellers are sometimes at odds with each other. Knowing these wants and needs, being able to put yourself in the other party’s shoes, will help in reaching a deal that is acceptable to both sides.

Looking Ahead / Looking Behind

As a general overview, the buyer is watching the road ahead. All discussions are filtered through a view of future goals. In contrast, the seller is watching the rearview mirror. All discussions are filtered through historical contexts. While both may be in the same room, they often hear different conversations due to their respective filters. Knowing this and trying to see through the other ‘s filter can make the whole process clearer.

And the buyer and seller want to convey different things: The buyer wants to convince the seller that he or she will take care of the pharmacy. The seller wants to convince the buyer that his or her pharmacy is the best pharmacy. It’s important to remember who the audience is in order to give it what it wants. For example, if the seller is concerned about money and the buyer is only focusing on employee retention, neither will be satisfied.

Win/Win

When buyers and sellers work together, it is easy to develop tunnel vision. While numbers are important, there is more to the deal than money. A deal must work in reality as well as on paper. The repercussions of a sale that doesn’t work out can be far-reaching and long-lasting.

The only good deal is one that is safe for both parties. So keep in mind the reality of the other party’s situation. As the parties continue to work together, the buyer and seller should build a rapport that lends itself to trust. This is necessary for the buyer to be able to comfortably accept the counsel of the seller regarding the safety of the deal. However, this trust should not interfere with healthy skepticism. As a buyer, we will need to check the data. But as well, we also listen to what the seller is telling us.

Trust is important in any situation, and it is absolutely necessary to the process of win/win discussions. Both parties must feel free to offer suggestions and pursue safe outcomes. However, even in situations where trust is established, conversations may turn heated. In such cases, simply take a break from controversial items and leave them for later when cooler heads can prevail. Remember that the goal is to reach the safest deal, not just the one that brings you the most dollar signs.

Trust/Intuition

Trust during the sale of a pharmacy is crucial. But trust isn’t something you just throw out on the table. Trust is earned. In time, a buyer learns to trust a seller and a seller learns to trust a buyer. As the sale process continues, both will reach a level of comfort with the trustworthiness of the other. However, if this doesn’t happen, it may be best to reevaluate if the person you are dealing with this the right fit for you.

Image: leaf Stock Photo

By Colony RX

Preparing To Sell Your Pharmacy

 If you want to:

  • Achieve the best price for your pharmacy.
  • Agree terms and conditions of sale, which are favorable to you.
  • Have the sale progress through each stage quickly and with minimum stress.
  • Have a positive relationship with the buyer, the staff, and all other stakeholders during and after the sale.

You need to:

  1. Adopt the right attitude. This means being committed to the sale. You should therefore be sure that you are ready to sell your pharmacy before starting the process.
  2. Be realistic about the price. While ColonyRX has a reputation of paying top dollar for pharmacies, it is important to have a realistic objective.
  3. Be proactive. The only way the sale will progress quickly is if everyone involved is proactive. This means that the seller, the sellers’ lawyer, the buyer, and the buyer’s lawyer, all need to be committed to the sale and be responsive.

Lawyer – Virtually any lawyer can close a pharmacy transaction. It is not important that they be experienced in pharmacy transactions, only that they be responsive.

Accountants – You will want to tell your accountant about the transaction in order to properly address any tax issues.

Essential documentation:

There are different types of documentation that ColonyRX will need to review during its due diligence of the pharmacy, including:

  • Accounting and tax records;
  • Script reports from the pharmacy software system;
  • Copy of the lease. If you own the property, we will agree on a new lease.

Different perspectives:

Look at your pharmacy from a different perspective, for example, what would you be looking for if you were buying the pharmacy?

Buyers want:

  • To know they are making a sound investment.
  • Potential to increase the sales and profitability of the pharmacy
  • A pharmacy that they feel is relatively safe from competitors.
  • A pharmacy with a path to growth.
  • A pharmacy with dedicated and loyal employees.
  • To be confident that the pharmacy’s prescribers will be there in the future.

If there are issues that could negatively impact your pharmacy, this does not mean that you can’t sell it. A problem for the seller is not necessarily a problem for the buyer. Just be sure to disclose everything so Colony RX can work through any issues with you.

By Colony RX

If you are selling your pharmacy, the value of your pharmacy will be based mainly on its profitability TO THE BUYER after the sale.

How Much is My Pharmacy Worth_

If a buyer will operate the business, the key figure that will be looked at is the pharmacy’s EBIDA, which means Earnings Before Interest, Tax, Depreciation and Amortization. EBIDA really means the amount of profit the pharmacy will make after adding back the labor value that the seller provides to the pharmacy. For example, if the seller works 40 hours a week in the pharmacy as PIC, we will look at the profitability minus the cost of a 40 hour/week PIC.

Profitability aside, there are other factors that impact valuation:

Location is important. A pharmacy that is in (or near) a small medical clinic in a small town is not going to command the same multiple of EBIDA as other stores. This is especially the case if the pharmacy is dependent on a small number of prescribers.

Pharmacies in some parts of the US are more sought after than others. Businesses in certain rural areas may struggle to sell because there is simply not the demand. On the other hand, pharmacies in major metropolitan centers usually have more buyers.

Any threat to the viability of a pharmacy will affect its value. For example, any legal or regulatory issues (DEA, Board of Pharmacy), or a loss of key prescribers to the pharmacy.

A major factor affecting a valuation is employment costs, particularly if these are higher than average. The cost of wages impact EBIDA, and if the store is overstaffed, or the staff are overpaid, this can impact valuation. One of the key factors driving employment costs is the number of hours the store is open. It is expensive to keep a store open at 10pm on a Saturday, and there are few people filling prescriptions at this time.

Sometimes we hear a seller say that the buyer can sort out any staffing issues after they buy the pharmacy. However, Colony RX cannot begin its relationship in a pharmacy by making people redundant. It would negatively impact our relationship with the remaining staff and could ultimately diminish patient care.

High rent, unusually expensive properties, owners with unreasonable terms in their lease, or leases which are not renewable will all affect the value of a pharmacy. As a buyer, we intend to operate the pharmacy “forever” and need a long term lease because the location is a valuable component of the goodwill of the pharmacy.

The value of your pharmacy may be impacted if a substantial part of profit comes from institutional business, such as care homes, 340B, prisons, nursing homes, etc. As a general guide, if more than 10% of your prescription business comes from institutional business, it will impact valuation. Business to institutions can be easily lost, despite the existing relationship and quality of service the pharmacy provides. This will also be the case with any non-traditional pharmacy, such as specialty, compounding, special programs, or unusual things the pharmacy does. For example, we once looked at a pharmacy that ran a very large costume shop!

Last, when a chain buys a pharmacy, the two issues they mainly look at are profitability of prescriptions and likely retention. At COLONY RX, we are absolute experts at working with chain stores to show them the maximum possible potential of these variables.

At Colony RX, we look at all of these factors holistically in coming up with a maximum valuation for a pharmacy.

For more information, see our page about valuation.