November 8, 2017
In our first installment, we reviewed three of the key factors that drive the value of your pharmacy business: financial performance, growth and stability, and recurring revenue. Today we continue our journey to identify two other factors that drive the value of your pharmacy business.
#4 – Concentration Risk
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.
#5 – Reliable Financial Information
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.
#6 – Taking the “YOU” out of your business
A: Human Capital – Quality of Staff
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, their expertise and bench-strength are key value drivers. 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.
B: Operating Systems and Procedures
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 its 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.
In our next article, we will discuss the important role that differentiation, competitive advantage, customer awareness, and reoccurring revenue plays in the value of your pharmacy business.
Mike Jaczko, BSc Phm, CIM® is a pharmacist by background, is a portfolio manager and partner of KJ Harrison, a Toronto-based private investment management firm serving individuals and families across Canada. For more information, email:firstname.lastname@example.org.
Max Beairsto, B.Sc. Pharm., MBA, CVA is a certified valuation analyst and business intermediary with Enterprise Valuators, an Edmonton-based valuation and business sales advisory firm. Their Pharmacy Edge division assists pharmacy entrepreneurs across the country needing transactional and valuation advice. For more information, email: email@example.com