The experts seven top tips to look at when buying a pharmacy

If you wanted to be successful or improve your abilities in any endeavour or skill you would want to learn from the best. For example if you wanted to understand the share market and investing you would give your right hand to learn from Warren Buffett, arguably the most successful long term share investor in the world. So when it comes to investing in pharmacy (acquisitions) I am fortunate to know some of the best who between them have been involved in the purchase of over 250 pharmacies, they have kindly shared their top tips with me so I can pass that knowledge onto you.

Before I share the pharmacy experts’ tips on pharmacy acquisitions I wanted to introduce a few tips Warren Buffett shared on investing in companies in one of his annual letters to Berkshire Hathaway shareholders. See if you can spot the similarities when you read the list of tips the experts shared when they look at acquiring a pharmacy, certain laws and fundamentals never change.

  • Focus on a few simple fundamentals: if the businesses are successful your investment will be successful, disregard mob/media fears.
  • Don’t believe safe havens cannot be risky.
  • Don’t forget price is number 1: focus on the fundamentals is a common thread.
    • Does the acquisition have high grade management, good staff
    • Durable competitive strengths.
    • Opportunities for internal growth.
    • Good return on net tangible assets.
    • A sensible purchase price to valuation were cited as the key things that make a good acquisition

Now for the pharmacy experts’ top tips when investing in a pharmacy (acquisition), no particular order of importance.

1.     Potential for Growth / Can you Add Value:

  • Small in size can it be expanded or relocated, change the model or improve the presentation of the store.
  • Add a medical centre next door.
  • Large turnover out of a small size store less potential for future growth.
  • Is the surrounding population increasing?

2.     Profitability is There Upside / GP% (High or Low)?:

  • After removing high cost low margin Hep C drugs if the GP% is low is it due to prices too low, poor buying? Can GP% be improved?
  • Are they losing sales if prices too high, can the retail offer be improved?

3.     Rent to Sales Ratio / Lease:

  • Gross rent to turnover less than 5% is ideal.
  • Good lease (low yearly increases + options to extend term)

4.     What Are The Risks / SWOT Analysis on the Pharmacy & Competitors:

  • Potential loss of contracts (Aged Care Packing)
  • Potential changes to the shopping environment or traffic flow/parking.
  • Potential for new competitor to enter the market.
  • Strengths, Weakness, Opportunities and Threats

5.     Culture Of The Store & Staff:

  • Good staff culture, are they a happy bunch do they smile when they talk to customers?
  • If the store has a poor culture takes time and energy to break that down and turn it around. Often involves changing staff to get it right.

6.     Style Of Pharmacy To Suit Your Strategy / Location:

  • Are your strengths towards retail or professional services, discount or full customer care?
  • Is the business in a shopping centre, local community strip or medical centre?
  • Does the pharmacy provide methadone, aged care packing or compounding as you will need a pharmacist / manager who likes doing those things and can do them well.

7.     Fair Price / Market Price:

  • It is important that every store you buy eventually will provide a good ROI, otherwise why invest.
  • Usually 17% – 18% cap rate depending on the geographic location.
  • If you don’t think the shop can be improved much then don’t pay over the odds for it.
  • Quality stores in good location always attract higher levels of interest from buyers.

What I see happening is young or inexperienced buyers sweating the small stuff, I always remember the saying “Over Analysis Causes Paralysis”. Focus on a few key fundamentals is good advice, one of the expects only wants to know a few key fundaments, sales turnover, GP%, rent and size of the store plus wages, that’s it.

My sincere appreciation to Steven, Anthony, Stan and Ameet for sharing with me their key tips when investing in a pharmacy acquisition.

– Ian Fedrick, Partner and QLD Sales Manager at AP Group

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