Buying a pharmacy is no small feat, but here are 10 tips on key things to consider, by leading pharmacy broker Natalie Sirianni
There are many steps in the process of buying a pharmacy that can be both time consuming and complex, but at the end of the day, your pharmacy purchase will hopefully bring you great success.
Today I will focus on the financial side of buying a pharmacy. I know for many pharmacists and pharmacy owners, running a pharmacy is about much more than money.
Owning a pharmacy is a great platform for you to give back to your community and use innovative ideas to improve the lives and well-being of your patients and your team. But in order to do this, it is important that you get the financial side right too!
Here are my top 10 factors to consider when analysing a potential pharmacy to buy:
Sales and more importantly profit growth is a key factor to look for when buying a pharmacy. Historical trends can give you an idea for growth but it is important you forecast what growth you believe you can achieve post purchase. It is also important to consider what growth opportunities the business may have. For example, is the pharmacy currently completing professional services, or would that be an area of growth for you moving forward? Sometimes businesses that are currently underperforming will have the best opportunities for upside. And remember, the growth you can achieve will determine your overall return from your investment in the business.
- Gross Margin
Gross profit margin is another key factor that is critical to consider when analysing a business’ performance. The gross profit margin encapsulates a number of factors about the pharmacy including the buying power, competition, product and sales mix, discounting and branding. For a pharmacy purchase, it is important to consider whether you can maintain the current gross margin for the business or perhaps improve it. Any changes made to gross profit can have a significant impact on the overall profitability of the business and therefore are critical to the viability of the pharmacy.
- Team & Wages
The wages expense for a pharmacy is often the second highest expense after Cost of Goods Sold. Therefore, it is important to review the wages and identify the sustainability of the wages expense. It is also very important to look at the pharmacy team as an investment rather than a cost. In the case of a business sale, the team are often your biggest asset to ensuring continuity of trade during the sale process. Therefore, a buyer should consider the team that is currently in place at the pharmacy and determine their strengths, weaknesses, any changes that could be made to improve performance as well as how the new owner will fit into the operations. Also consider how your proposed business strategy will impact on wages.
Profit is perhaps the most important factor to look for when analysing a business Profit & Loss. The bank loan will be paid back by the profit and it is also where the owner gets his/her return. Profit is also the basis for how the pharmacy price will be determined and how bank valuations are calculated. Therefore, it is a critical factor to consider! Ultimately, when buying a business, you want to ensure you can continue to earn good levels of profit and also grow this if possible.
- Sales & Profit Variation
When buying a business, you will be analysing the historical performance of the business so that you can best forecast what you believe may happen in the future. Review at least 3 years of historical statements to see if there have been any variations in results over the last few years and if so, determine what the reasons may have been for any variations. That will then allow you to have some level of confidence about the future performance.
Rent is another important expense to look at as it is often the third largest expense for most pharmacies. Rent is determined by the lease and cannot be altered, unless you get a rent reduction (which does not happen very often) or you move sites (which can be costly). When reviewing the rent, it is important to look at the current rent level and also the lease terms (see next point).
- Lease Terms
Lease terms are a critical part of your occupancy costs and should be considered in conjunction with the rent. Key factors to consider include the rent review methods (i.e. how the rent is increased each year), any market reviews applicable, length of the lease term, any option periods, marketing costs payable to the landlord and any other terms and conditions.
Pharmacy and other nearby competition is also important to review when buying a pharmacy. A buyer should examine the current competition in the local area as well as any potential changes to competition. It is also important to consider competition from non-local competitors such as online etc.
- Local Area Developments
As mentioned earlier, growth opportunities for the pharmacy is a key factor to consider. Local area developments can have a significant impact on the future growth potential of a pharmacy, therefore these factors should be considered and factored in to your decision (whether positive or negative). The population and local area demographic (as well as any changes in these) should also be considered.
- Reason for Sale
The answer to this question can sometimes be difficult to obtain however it will give you a good understanding and insight into the business trajectory. Most pharmacy businesses that we are currently dealing with are retirements of the vendor, however any insight you can get in relation to the sale will certainly assist with your understanding of the business.
Buying a pharmacy can be a long process, but often with a great reward at the end.
In my role as a Pharmacy Business Broker, I’m very lucky to get to witness and be part of some of these great success stories. I wish you great success with your pharmacy purchase!
Ph: 1300 ATTAIN (1300 288 246) or 03 9853 7431