Documenting Your Pharmacy Business Activity
One of the first steps in selling your pharmacy is to determine its value. Let's digress for a moment, and look at the meaning of that word. Various schools of economic theory differ mainly on how they define value. Put simply, value is related to how much a buyer is willing to pay for an item. But is this subjective assessment based on demand vs. supply, or outcome, or some other metric? In pharmacy terms, a multiple of any sales figures is a less accurate value than one based on the free cash flow (profit available for owner's salary, return on investment and debt servicing).
The starting point to establishing the value of a pharmacy is Aventine Group's expert evaluation of the pharmacy's documentation. Whether for internal purposes or for selling the pharmacy, the accuracy of the valuation depends on the quality of the documentation provided by you, the owner. This documentation is also essential in convincing a potential buyer of the pharmacy's value. A buyer is usually represented by accountants and attorneys, who get paid to protect their client by taking a critical view of every aspect of the transaction. They will scrutinize your documentation and view any mistakes with deep mistrust.
In our experience, there is often scope for improvement in the paperwork of small private businesses like independent pharmacies. A busy pharmacist, who leaves the details to his accountant, may find that his business seems less profitable than it is because of clever tax-avoidance constructions. While legal, these do not provide a clear view of the pharmacy's profits. Consider changing this to show the best picture possible regarding gross margins and expenses applicable to a new owner. For example, depreciation on items not included in the sale is not relevant to the new owner. The additional taxes are usually more than covered by the higher asking price.
When selling a pharmacy be certain that you have the following general documents:
- the history of the company and its owner(s)
- a detailed description of what is for sale, and what not
- details on the industry and the pharmacy's (local) market share
- current and recent litigation
- organization chart
- inventory per product
- marketing literature
- listings of suppliers, customers, and business advisors
What a pharmacy buyer and his advisors wish to see are the following records, as up to date as possible:
- Financial statements for the past three years, including profit and loss, Federal and State tax returns, balance sheet and all schedules. State sales tax returns can also provide a view on gross receipts for a given period.
- A current profit and loss if it as been more than 90 days since your last full calendar or fiscal year of business.
- Bank statements from at least the last six months, showing receipts and payments. Also include statements for any money market accounts where you might have extra money.
- Payments from the major third party payers in your area, also for the last six months. With over 85% of payments originating from a third party, this documents the pharmacy's involvement with third party payers in terms of prescriptions and receipts.
- A standard report provided by your prescription department computer system on all prescriptions filled. This could be new or refill and generic or brand, usually sorted by third party payer. If you need help, contact your system supplier's help desk. Please note that these reports are often not accurate - check how your system reports gross margins and how the prices of goods have been loaded. If your system does not provide you with an accurate gross profit for your Rx department, be prepared to fully explain why not and back up an accurate number with more documentation.
- A copy of your current lease, which shows all terms, rents, additional charges, and any restrictions. A proposed lease contract will suffice if you own the building and plan to lease it to a new owner.
- A copy of your salary administration showing all employees on the payroll, their job descriptions (or titles) and their compensation.
- Forecasted financials (balance sheets and income statements) for the coming five years.
Together with our professional valuation, these documents arm you as owner to discuss the value of your business with potential buyers, confident that you can back up your assertions, however, we recommend that you leave any negotiations up to our brokers and specialists to avoid possible emotions from interfering. It takes some extra work to keep the documentation up to date, but it is worth it as you never know when your ideal buyer will walk in through your door unexpectedly!