The market for sale of pharmacy businesses has most certainly been buoyant lately. From what we have experienced and from our discussions with pharmacy brokers, pharmacies are selling quickly. They are also achieving good sale prices, and often with premiums. Which if you are a seller, is great news.
But what if you are a buyer?
Certainly, if you are one that has a good financial backing then you can still see this through. But what about the first-time buyers? What about those young pharmacy managers looking to acquire their first interest in a pharmacy partnership?
Well, there is a real risk here of them being priced out of the market. But there is another risk lurking in the background. One that is yet to rear its head.
Pharmacy has largely been through some good trading times. Covid brought many people into pharmacy for vaccinations, RAT’s, PPE etc. That combined with the inability to travel meant many more people shopped locally. Accordingly, turnover and profitability in pharmacy has generally gone up and pharmacies have been trading well. But we live now in very different times. People don’t need vaccinations, RAT’s and PPE like they did before. They don’t have to visit a pharmacy as often as they did. Granted there will still be an element of vaccination income going forward.
There is also the issue of inflation and interest rates. As these go up, the average family has less money to spend. Consumer spending therefore has a real risk of declining. What does that mean for pharmacy? Perhaps 2023 is a very different world in pharmacy land than 2021 and 2022.
The main point I want to make here is, are these risks being taken into account? Does the current crop of buyers understand what the margin of error is?
Let’s go through a hypothetical scenario.
Turnover $2,500,000
Gross Profit $875,000 (35%)
Other Income $60,000
Expenses
Rent $120,000
Wages $350,000
Other Expenses $150,000
Total Expenses $620,000
Net Profit $315,000
Valuation at 15% cap rate $2,100,000
What does the cashflow look like on a $2.1m purchase?
Profit $315,000
Loan Repayments $206,400 (assume 15-year term, 5.5% interest)
Tax $61,500 (assume 30%)
Net Cash $47,100
All else being equal, surplus cash of $47k also equates to $134,571 in sales, or a 5.38% margin of error. Meaning sales can fall by 5.38% before your cash is gone.
Now what if the cap rate was 14%, or you paid $2,250,000. The surplus cash is only $98,500, or 3.94% margin of error.
What if we set inflation at 3% on all expenses? At a 15% cap rate your margin of error is $81,500, or a 3.26% margin of error. At a 14% cap rate, 1.82% margin of error. It starts to get a little fine now, doesn’t it?
Now this is a very simple model, and in the real world there are many, many variabilities here. Lease agreements may be based on fixed annual increases of 3-5%, or CPI. Wage growth has been very strong lately, particularly with pharmacist wage rates. There might be options to grow health service income streams. Also, owners will often start cutting costs, cutting hours back on rosters, and do whatever it takes to survive.
It makes you ask the question though, is this sustainable?
If you are a buyer in the current market, you need to have a good understanding of what your cashflow looks like. The critical questions you need to ask?
Profit and cashflow are very different things. Understand what cash drawings are likely to be
What are the loan repayments going to be?
What is the tax component?
What does your cashflow need look like?
What is your margin of error?
Have you factored in other issues that will impact your cashflow, such as increasing stock levels, future fit outs (whether minor or major), potential changes in competition etc etc.
Have you identified your growth opportunities?
The most crucial question of all though. Despite what ever dark clouds are on the horizon that may impact consumer spending and pharmacy turnover, what strategies are you going to employ that can protect and grow customer numbers and script numbers?
Cutting costs are fine, but there is only so much you can do. And you shouldn’t be cutting costs on those areas that are likely to make you money. Marketing spend should not be cut. Reviewed for effectiveness and Return on Investment yes, but cut no. The effort and focus has to be on growth strategies, and pushing really hard to engage with your community. i.e. increase that margin of error.
At the end of the day, any strategy you employ must aim to achieve at least one or more of these pharmacy KPI’s.
Increasing Customer Numbers
Increasing Customer Loyalty
Increasing Customer Frequency
Increasing Customer Spend
We have a ton of content on our website relating to growth strategies. So please check out our blogs and podcasts.
If you are considering buying a pharmacy or buying an interest in a pharmacy, then please reach out to either myself or Priya Narsing so we can help you through this vitally important phase.
