EVCOR and KJ Harrison, along with their associated advisory partners, are delighted to present the EVCOR Business Health Checkup Program (BHCP) for pharmacy owners. We believe it is an excellent initial step towards maximizing the value and profitability of a pharmacy business and in turn, creating personal wealth.
Mike Jaczko, BSc Phm, CIM® FEA, is a pharmacist by background and is a portfolio manager and partner of KJ Harrison, a Toronto-based private investment management firm serving individuals and families across Canada.
Max Beairsto, B.Sc. Pharm., MBA, CVA is a certified valuation analyst and business intermediary with EVCOR, a Canadian valuation, management, and transaction advisory firm assisting pharmacy entrepreneurs across the country needing transactional, management, and valuation advice.
As stakeholders in the pharmacy industry, we are fully committed to the viability of the independent pharmacy and, as such, are passionate about business ownership and all facets that keep the value in them. We have over 50 years of combined specialization in pharmacy acquisition and management consultation. You deserve that kind of experience on your side, whether you are purchasing your first pharmacy or divesting your lifelong achievement.
The performance of a business can be quantified by investigating certain profit factors. How well the business performs in these areas is also reflective of how it will be valued in the marketplace. We have developed a system to not only benchmark a business on these drivers but to guide independent pharmacy owners on a path to help them correct any identified deficiencies. One owner, in particular, was able to increase his bottom line by over 100,000 per year - which in today's market substantially increased his valuation.
Additionally, we will provide a pricing analysis to estimate the market value of the business. This serves as a good reference point to monitor your progress as you implement changes and a springboard for a comprehensive strategic wealth, tax, estate, and corporate structure plan.
Our first step is to benchmark the business against our database of stores to see how it compares. From this starting point, we make suggestions for improvement based on industry best practices. In the reporting, we identify the strengths and weaknesses of the business and provide guidance to help the owner develop an implementation plan. Through our alliance, we can even offer advice on workflow and clinical program efficiencies.
It’s time to focus on the factors that drive the value of your pharmacy business. The benefits are two-fold. Think of a profit-building factor as merely a characteristic of your pharmacy business that either reduces the risk associated with owning the pharmacy business or a component that enhances the prospect that the pharmacy business will grow further in the future. Of course, the corollary is the greater the risk; the less a buyer is prepared to pay.
“Cash flow is king.” Everything you have worked for boils down to how much cash flow your pharmacy business generates year-over-year on a predictable basis. A predictable pattern will garner a premium price when selling. It is all about
“risk.” The lower the risk of losing the cash flow in a transfer of ownership, the higher the value to the buyer.
It goes beyond stability of the earnings; however; the cash flow from your pharmacy business needs to be both substantial enough to attract a buyer but proportionately in keeping with industry norms. The absolute value of your cash flow should be over a certain threshold to entice the buyer and allow him to withstand market fluctuations. Your cash flow as a proportion of top-line sales should also be commensurate to your peers.
Acquirers typically pay the most for businesses with the greatest growth rate and potential to grow. In rare cases, an acquiring company may even buy a business that scores high on growth potential but low on other attributes, because the acquirer sees a way to leverage some of its own assets to help the business
grow much more quickly than it could under its current owner.
Businesses with recurring and predictable revenues are the number one greatest creator of wealth for astute pharmacy business owners. Businesses that create recurring and predictable revenues always attract interested buyers. This is why pharmacy business owners are often able to sell their practices on retirement for considerably more money than when a doctor or lawyer attempts to sell their practices. We refer to such practices as “zero-based” revenue businesses.
Buyers are willing to pay more when their perception is that the cash flow of your pharmacy business is substantial, predictable, growing, and recurring.
Broader patient and customer bases will increase the value of your pharmacy business. Wider prescriber bases reduce dependency on a specific prescriber, in the event that the prescriber leaves.
Concentrated patient and prescriber bases are associated with greater risk and lower earnings multiples. We are growing increasingly leery of the evolution of concentrated prescriber clinic-based pharmacy businesses. Pharmacies who enjoy a broad community base of customers and patients and who are not dependant on one or two prescribers, garner higher earnings multiples.
Furthermore, contract-based revenue practices also garner lower earnings multiples attributed to the potential aperiodic nature of the earnings streams associated with long-term care and infusion clinic practices. We are not suggesting that they are zero merit practices; however, such practices result in riskier and lower visibility regarding the predictability related to their resultant cash flows.
Professionally prepared and reliable financial statements are a must. Investing in financial information prepared by a chartered professional accountant is a great investment in your pharmacy businesses’ future value.
Never cut corners expecting to get away with anything less.
Furthermore, reliable financial records and supporting documentation will substantiate the claim that your pharmacy business is what you say it is. Properly organized reports and working documents will provide comfort to a potential buyer when reviewing past financial performance, leading to shorter turnaround times and higher offer values. Of course, the alternative is true; poor documentation and shoddily prepared
internal financials will foster doubt and lower value offers.
Having reliable reporting provides you with the proper tools to manage your business on an ongoing basis. It is imperative to measure, and to measure properly your progress in order to successfully build profits.
Does your store continue to operate effectively if you are away? Notwithstanding lower volume practices, are you dependant on a single tech or pharmacist to keep your practice running smoothly? Stores with poorly trained, undelegated, and unmotivated staff could distract from the value of your pharmacy business. Talented staff forge relationships with your customers that form the basis of the value of your pharmacy business. The quality of your staff experience, expertise and bench-strength are key profit builders. Capable, well-trained, and caring employees will facilitate easier transferability to the next owner. The higher the likelihood of customer and patient retention, the lower the transfer risk, the greater the value of your pharmacy business.
The establishment and documentation of standard operating procedures (SOP) demonstrates that your pharmacy business can be maintained profitably after the sale and that YOU are not required for this to happen. Your SOP can include computerized and manual procedures used in the business to generate revenue. But beyond this, automated procedures show the acquirer that you are less reliant on the human element than another potential target. An alternative method to “remove yourself” from the day-to-day is to identify a key dispensary staff member who has the authority and experience to “take charge” even while you may be on shift. Note that this key staff member does not necessarily need to be a pharmacist.
Your “Monopoly of Control,” as described by John Warrillow in Built to Sell, describes a concept that answers the question of how well your business is differentiated from competitors in your industry. Seth Godin, who wrote the Purple Cow, also laments on the importance of uniqueness and differentiation in your organization. Essentially though, it boils down to creating a business where you have created your own monopoly; it is the only place where your customer can shop for your unique offering of services, products, and courtesy.
The provision of unique value-added services and products is the glue linking your pharmacy business and your customers and patients. Creating some form of competitive advantage to prevent competitors from copying your activities will provide a “moat” around your pharmacy business. Some buyers will pay a premium for a niche that has barriers to competitive entry, but this can be a double-edged sword. If you have created something so far off the beaten path, it is sometimes difficult for a corporate buyer to envision your business in their fold.
Experts have identified numerous ways to create a competitive advantage, but some
seem to resonate more with the pharmacy industry. Although trademarks and patents do not readily lend themselves to creating a competitive advantage for a pharmacy; developed processes, compound recipes, training programs, published articles, specialized licenses or certificates, and service contracts do. Do not discount your location – and the security of your lease either – as this can serve as a major barrier to entry for your competitors.
While the patient/customer relationship is somewhat related to competitive advantage, it is nevertheless deserving of recognition on its own. How likely are your patients to return to renew a prescription/re-purchase a product or even better, refer friends and family to your pharmacy? The majority of your peers do not actively seek out – or quantify – the answer to this, but your corporate competitors actively pursue this information.
Stability, consistency, repeatability, reliability, and sustainability are a few of the key attributes to establishing a meaningful customer relationship. Your quality marketing program needs to create name recognition (of both the business and key employees) and build customer awareness and loyalty. A long history of efficient operations, producing timely and accurate prescription output, and complimentary professional advice will drive a valuable reputation in your community.
While the value of your business will in part, be related to the hard, tangible assets, it is the goodwill that constitutes the majority of the price a buyer will pay. Therefore, it is these softer profit-building factors that will help drive goodwill in your pharmacy business. Relationships and patient/ customer habits remain the nectar of the valuation gods.
Although some buyers in the market focus almost entirely on numbers in their approach, it is important that you pay attention to the layout and physical appearance and condition of your facility and equipment. This factor extends beyond the shelves, ceiling, and floor, but also to the tidiness and cleanliness of work areas and your staff. Missteps can unintentionally leave an impression with the buyer that your internal workings and documentation are in similar disrepair. Ensure that you are investing in staff uniforms that are both department and position appropriate and are fashionable. Use of name tags identifying positions like a registered pharmacy technician, clerk, or even pharmacist provides a professional image to the patient or customer and removes any uncertainty in the customer’s mind.
Some owners become velocitized by their store and forget to view it through the eyes of their patients and customers. Removing clutter from the front of the store, clearing windows of material that blocks people from seeing in is important – as is removing those fossilized pieces of tape that invariably get missed. Fresh paint is an inexpensive way to create a fresh, professional new look and do not forget to look up to see if the lights and ceiling are clean and free from danglers.
On a similar vein, the buyer will not discount your store based on what they perceive will be the capital cost of mending what has been neglected.
Need help with a store design and layout that drives sales and profitability – contact us today
We sound like a broken record when we mention risk, but it is risk mitigation that ultimately increases your value. This last builder of profit is not entirely unique to pharmacy but is one notion that is overlooked by many buyers and sellers. Audit risk comes in many forms: narcotic, third-party payer, tax, and, now in some jurisdictions, in the form of professional service provision audits. We encourage you to create – or re-visit – your narcotic tracking procedures and documentation protocols for short-fill duration prescription authorizations. You should ensure that you adequately document patient encounters when providing professional services, and finally, in conjunction with your accountant, you need to assess your business for tax audit risk liabilities.