Having found a pharmacy opportunity it is important to understand if it is affordable. The affordability question is distinctly different from the question of what the pharmacy valuation is. Each pharmacy has a different set of circumstances, therefore each must be considered on its own merits.
Affordability will be influenced by the following main factors:
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The price paid;
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The equity contributed (whether 100% borrowed or the equity is in the form of cash);
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The rate at which the loan principal is repaid;
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Your ability to grow the existing business with the 6th Agreement outcomes yet to be released;
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Externalities affecting the growth prospects (including competitive threats) of the pharmacy relative to the purchase price paid;
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The structure the pharmacy is owned in to manage tax outcomes;
To understand the opportunity as a potential purchaser you must gather the last three years financial information from the current owner and understand how the pharmacy has traded during that period. While historical data may not demonstrate the future, it should highlight any underlying trends – positive or negative.
Financial information includes profit and loss statements, POS reports, dispensary reports and any other management material available. These reports back up the information the seller has given you. If they don’t you must understand why.
From this, a detailed financial plan for the purchase of the pharmacy is developed to enable you to understand the cashflow of the pharmacy, enhance the pharmacy’s performance, to repay debt, pay tax, and living requirements. Cashflow will never equal profit in a pharmacy and these last three items absorb cash and are often underestimated.
The impact of price reductions in the dispensary is the most important issue affecting pharmacy at the moment. The fact that this exists should not prevent you from buying the pharmacy at the right price if there are opportunities for you to develop the business and mitigate some of the reductions. The issue is to recognise the impact in the feasibility and create some sensitivity analysis around it.
A hidden cost in any acquisition can be the stock that you are initially buying. It could be old and unsaleable at full margin. If you are intending on making changes to the in-store layout/design, you need to understand the increase or decrease in stock and how this will affect cashflow. Additional funding may be required – best you know early rather than later when it may be difficult to extend terms with financiers. Extending wholesaler terms can be as equally difficult.
The bank lending environment that exists today has changed. If you already know the affordability question, the process of applying for finance will be smoother because you can provide the bank with the forward budget and cashflow projections.
Understand that the affordability question is separate from the pharmacy valuation. If the valuation is not within expectation it may however influence the affordability assessment because more equity (or cash) may be required.
The pharmacy market may never be a ‘buyers market’ because the numbers of buyers may always outstrip the number of sellers. If however you understand your financial position and what the banks require, the impacts influencing the pharmacy and have a growth plan outside of the dispensary, you will be well advanced in understanding the affordability of the pharmacy opportunity.
Norman Thurecht, Partner, JR Pharmacy Services