Will your pharmacy be ready to sell when you are?
Business and Operations
What to do years before putting your store on the market
In brief:
- Buyers are looking to purchase independent community pharmacies.
- Ultimately, the pharmacy’s financial health will determine the price for which it will sell.
- By starting to plan for the sale a few years beforehand, a pharmacy owner may be able to find a buyer and complete a sale within months.
Avi Pelta bought James Pharmacy in Baltimore in 1987, and by 2010 he was thinking about selling the business.
The business was profitable, but Pelta was approaching 60 and was watching reimbursements fall, regulation increase, repeated audits from pharmacy benefit managers, and the introduction of Star Rating quality measures. “I wasn’t brought up in that world,” he said.
So a few years ago he put the business up for sale. He did so by working with his longtime accountant, who specializes in finances but not the pharmacy market. “I was probably overpriced,” Pelta said, and he ended up taking the pharmacy off the market after about eight months.
The benefits of pharmacy expertise
Pelta’s McKesson representative introduced him to Tammy McDonald, vice president of RxOwnership® for the Northeast Region. One of her previous roles in more than 17 years with McKesson was as a regional credit manager, assisting owners with credit, financing and startup needs. Pelta decided to work with her on the pharmacy sale.
“This was really a no-brainer,” Pelta said. Not only was there no commission to pay to RxOwnership, but “they have all the contacts,” he said.
“Tammy had a list of two or three potential buyers she could think of right off the bat,” Pelta said. These were buyers who were interested in a pharmacy of James’ size in that part of the country. He first met a potential buyer at the end of February 2016, and the deal closed in August. “If there was a communication issue between myself and the buyer, Tammy was happy to step in,” Pelta said.
Preparing for sale
Actions Pelta took in years leading up to the sale also made it attractive to buyers.
McDonald encourages owners who might want to sell in three to five years to reach out now to RxOwnernship. “We can give them feedback and some areas to focus on,” she said. Here are steps to consider:
- Put your financial statements in order. Perhaps the most critical element in successfully selling a pharmacy is having completed financial documents that show its value. “The value of the pharmacy is determined by profit and loss statement,” McDonald said.
- Staff it right. Having a good, friendly and trusted staff is important, but if a pharmacy is overstaffed, that will decrease its value. The extra staff members you’ve kept on when you should have cut staffing or family members on the payroll who don’t have an active role in the pharmacy affect the pharmacy’s finances.
- Offer more. Having ancillary revenue streams and offering something that differentiates your pharmacy from the competition will make it more attractive to buyers. Medication delivery, blood pressure and blood glucose monitoring, immunizations, compliance packaging, medication counseling, osteoporosis screening, and compounding are examples. Pelta’s pharmacy offered special packaging for visually impaired customers, too.
- Check the lease. A potential buyer may walk away if they must immediately negotiate with a landlord who wants to substantially increase the rent. If you have a favorable lease with time left on it for the buyer, that allows for a smoother sale.
- Consider financing part of the purchase. “Some buyers are looking for sellers to hold back paper, to finance a portion of the price,” McDonald said. In one common model, the buyer puts down 10% of the purchase price, the bank finances 80%, and the former owner finances 10%. “Carrying paper is a huge benefit,” she said. “Sometimes it’s the difference in getting a deal.”
- Maintain curb appeal. First impressions count with pharmacy buyers. Walk through the pharmacy as if you were a customer. That’s another thing RxOwnership can help with, McDonald said.
- Set a realistic price. What you think you need or want for retirement is irrelevant to what a buyer will pay. Your pharmacy’s financial statements will determine the value. If those statements don’t show enough profit to justify the selling price, a bank isn’t going to finance the loan.
Even if you don’t think you’ll be selling your pharmacy for a decade, get your financial statements in order now. Five years before a sale your financial statements should be “rationalized,” reflecting the true costs of doing business.
By examining financial statements at least monthly, owners will understand how specific expenses impact the bottom line, McDonald said. (See “Give Your Pharmacy a Financial Checkup.”)
Pelta reviewed his financial statements every week. “I would look at it sometimes on a daily basis,” he said, and that allowed him to make changes that kept the business thriving. For example, when the health plan for local longshoremen went to a mail-order pharmacy, Pelta expanded his delivery service, going from one delivery person to three trucks on the road. He also brought in a contract to provide medication for hospice patients at a facility and their homes.
However you plan to structure the deal, always talk with your financial planner and tax advisor. “There are tax implications, and owners should plan accordingly,” said McDonald.
For example, are the aisles cluttered? Are the shelves dusty? Is the lighting dim? Is there so little stock that the pharmacy looks like it’s preparing to go out of business? Once you decide to sell, maintain the business and don’t let it deteriorate.
What’s your pharmacy worth?
RxOwnership’s online Interactive Valuation Calculator can provide an idea of what your pharmacy may be worth on the market.
While a pharmacy owner may buy and sell a store just once in a lifetime, “the experts do this every day,” McDonald said, allowing them to give pharmacy owners a clear understanding of a pharmacy’s value.
The final price for Pelta’s pharmacy was less than his asking price, but he’s comfortable that he received what he could from the business.
“Buyers are looking to purchase independent community pharmacies,” McDonald said. “If owners are willing to price their pharmacy accordingly, they can sell it pretty quickly. A sale can go through within a few months.”