As a broker, pharmacy owners often ask me what can they can do to prepare their business for sale so that they achieve the best possible outcome. While the answer will vary slightly in each individual case, there a few key things that owners can do 12 to 24 months prior to selling that will increase the value of their business.
Buying a pharmacy is a huge decision and a long-term financial investment for most buyers. The most important fixed expense for all pharmacies is the rent, and consequently ensuring you have a long lease with reasonable commercial terms is the best way to ensure the future profitability of your business.
Banks are very hesitant to lend against pharmacies with less than five years left on the lease because they are concerned that an operator may not have enough time to fully repay a loan. If you’re thinking about selling your pharmacy, a sensible first step is to make sure that your lease is long enough. Requesting an additional option from the landlord is a simple and inexpensive strategy that is guaranteed to increase the value of your business.
I would also advise that potential vendors engage a professional lease negotiator to assess whether they may be able to negotiate better terms. Too often I see pharmacies with leases that are not reflective of the current market and are struggling as a result. A good lease negotiator should give you a free assessment of what they think is achievable before you have to commit to the process, and therefore there is no risk in having that initial conversation. You can then make an informed decision as to whether it’s worth investing some money now to hopefully save a whole lot more money in the future.
Understand Pharmacy Valuation Methodology
If you understand the methodology a purchaser and bank will use to value your business, it enables you to control the critical factors. If you don’t really understand the formula, then it will be very challenging to implement strategies that will have a meaningful impact. Most potential vendors are aware that their business will be valued by applying a multiple (the capitalisation rate) to their profit. What many don’t understand is how the capitalisation rate and profit figure are determined.
The capitalisation rate is essentially a risk factor attributed to your business. The more secure your profits are deemed to be, the lower the capitalisation rate and the higher the price. Equally, if the bank or buyer believes that it may be difficult to maintain the current profit levels, they will assign a higher cap rate and the price will be lower. The main factors considered when assessing the capitalisation rate are security of tenure, competitive landscape, current performance trends and security of revenue streams. Many of these factors are outside the control of the operator, and that is why securing your lease is critical.
Impacting the profits of the business is generally more achievable. Again the commercial terms of your lease are the most important factor, however, there are two additional KPI’s that purchaser will focus on when assessing your business.
Each and every pharmacy owner is always trying to grow sales, however, in an increasingly competitive industry this is becoming more and more challenging. In my experience, it is often easier for owners to increase profits by looking to improve the margins on their existing sales. Being disciplined with pricing, managing your product mix and researching the benefits of different buying groups or franchises can all yields good results. Owners are often apprehensive about changing the way operate their business, but being genuinely open to change is important if you want to maximise the performance of your business and achieve top dollar when you exit.
The other key expense in addition to your rent is wages. Although this expense item may potentially be benchmarked by a valuer, they are becoming less inclined to make adjustments and very often I review businesses that have staff costs well in excess of what is necessary to efficiently operate the store. I appreciate that it is often difficult for owners to reduce the hours of their staff members because they care about them and want to support them as much as possible, however, if you’re committed to increasing the profits and value of your pharmacy, this is often a simple way to make a significant improvement quickly.
Lastly I think it’s important to highlight the benefits of presenting your business professionally. You wouldn’t hold an open inspection of your home if it were dirty and cluttered, equally it is just as important to present your pharmacy in its best possible light. Primarily this means having all your financial and trading information up to date and presented in clear and concise manner as well as ensuring the pharmacy itself looks neat, tidy and well stocked. If interested parties can’t understand the information they are provided, then they will simply move on to another opportunity that is easier to assess.
While there are many factors that will impact that value of a pharmacy, some are outside the control of owners and others are very difficult to influence. By focusing on the key areas listed above, pharmacy owners will successfully increase the value of their business as they prepare for a sale.
– Jack Brown, NSW Sales Manger and Partner at AP Group