Selling Your Pharmacy? Think Like an Investor

October 20, 2024

When I talk to pharmacist-owners, it’s usually clear that they have a deep emotional connection to their stores. And why not? After all, they’ve spent years building their pharmacies into vital community healthcare providers. Yet when it’s time for selling a pharmacy, thinking like an investor becomes essential. Viewing your business objectively, not just as an operator, but as an investment, can make all the difference in maximizing its value and ensuring a successful sale.

What investors want
Investors look at businesses much differently, and maybe more coldly, than operators do. For them, the primary goal is not to have a place to work or to become a pillar of the community or to keep their family housed, clothed and fed. Rather, an investable business is one that has the potential for them to grow their investment—in other words, to generate a positive return on invested capital.

Sellers should think like an investor for a couple reasons. One is that buyers are investors, and you want to make sure your pharmacy is as attractive to them as possible. The other is that you, too, are an investor in your pharmacy, not just with money, but also the toil, tears and years you’ve put into it. As an investor, you want to maximize your return on all that when you sell.

Investors look at certain attributes of a business to determine its potential. Three are pretty basic:

• Does the investment generate positive return over time?
• Does it have manageable risk?
• Is its revenue/profitability stable and consistent?

Again, these are basic criteria, and I would say a business that meets them would qualify as a good investment. If you’ve been running a pharmacy successfully for several years, then it would probably qualify as just that—good. Yet if you want to maximize your return, you should aim higher. When you sell, you want your pharmacy to be a great investment.

How can you get it there? To my mind, it can come down to two attributes that, frankly, not enough independent owners pay attention to.

Liquidity

The first is liquidity. In other words, will it be easy to sell my pharmacy? As assets go, private businesses tend to fall within the range of low liquidity, although there are several concrete steps you can take to maximize profitability and reduce risk, which inherently make it more saleable.

However, liquidity isn’t just about being able to sell when you plan to. It’s also—importantly—about being able to sell when you need to. The latter is more often the case than many pharmacy owners would care to think about. In the business brokerage industry, it’s accepted wisdom (though impossible to fact-check) that half of business sale transactions are unplanned. We can go in-depth about why that happens, but for now let’s just boil the most common reasons to five D’s: death, divorce, disability, disagreement (usually among shareholders), and a last one I will call distress—personal issues, financial problems, or just plain old burnout, which is becoming more prevalent among pharmacist-owners these days.

To maintain your pharmacy’s liquidity, then, you need to think about how to prepare for the unexpected. For instance, who will be your replacement, temporarily at least, if you die or are disabled? Do you have a good commercial lawyer to whom you (or your survivors) can turn? Is your tax mitigation plan for selling ready? And have you identified a qualified transaction advisor who can help handle the sale of the business, especially if you are not around?

Accurate Information
The other often-overlooked attribute of a great investment is availability of information. Just as most private businesses are inherently illiquid, so, too, do they tend to have low availability of information—that’s why they’re called private! And unlike public stock markets, where all market participants are acting on the same information, there is no shared mechanism for price discovery. But that does not mean that you, as the owner, should not have that information. In fact, one of the biggest hurdles to a successful deal is that the seller is acting on bad data.

One common occurrence of bad data is an owner’s unrealistic estimate of how much their pharmacy is worth in the open marketplace. Let’s say you are planning to retire after your exit and need a million dollars from the sale of your pharmacy to make that feasible. You think the store is worth $1.2 million—but what if you are wrong? If the marketplace says it’s worth only $800,000, then you’ll end up $400,000 short, your retirement plans might be dashed, and you might not be able to afford to sell your pharmacy when you want to.

So, to make your pharmacy a great investment, pay attention to quality and availability of information. Ensure that your accounting is complete, reliable and conducted according to best practices. And if you want a number for the value of your pharmacy, avoid “rules of thumb” like multiples of top-line earnings or revenue per script, which are almost always incorrect. Instead, get sound professional advice from a qualified, credentialed business valuator. It’s the best way to know, with reasonable certainty, perhaps the most important piece of information in a pharmacy sale.

 

Max Beairsto B.Sc. Pharm, MBA, CVA – is a pharmacist, valuation analyst and the president of EVCOR. EVCOR is a Canadian business valuation and boutique M&A firm that focuses on valuations and the sale advisory of independent pharmacies. Over the last 19 years through his company, he has been actively involved in hundreds of valuation assessments and consultations.