Buying Your First Business
It is becoming increasingly difficult for young pharmacists to buy their first pharmacy and "get into the game".
For many years, pharmacy has been a sellers market. Recently this has been compounded by the increasing number of pharmacies held by friendly societies, groups and networks, and effectively not coming onto the market in the normal cycle. This reduced supply, complemented by increased demand, has resulted in high market prices.
However, as a young pharmacist, you graduate, gain experience in various pharmacies and eventually manage a pharmacy. For the majority, getting to this rung on the pharmacy ladder is inevitable; however the next step up is always the hardest to take.
As a result, achieving ownership is now more difficult for many young pharmacists.
There are proven ways to evaluate your capacity to own and this knowledge is often readily available. Training programs such as Medici Capital's "Ownership Ready" series are designed for prospective owners to learn about the process and self evaluate their readiness for ownership. (see http://www.medici.com.au/ownershipready/ for more details)
However, the following is a checklist of a few items to help you get into the game.
Know what you can afford
The days of 100% lending under a wholesaler guarantee have been gone for many years.
You will need to assess what you can afford taking account of your net financial position. That is, how much cash and equity you have in your home.
Bank's will generally lend up to 80% of the lower of value or purchase price. However, purchase price will generally not include transaction costs (i.e. stamp duty, legal fees, and establishment costs). There are some institutions who will lend more, but often this comes with catches!
The key message is, "start building your capital early". The more you save now, the easier it will be to buy a pharmacy in the future.
Medici Capital has a number of young pharmacy clients who have been able to fund more than the 80% through use of a mezzanine finance fund. However, these types of funds come at a higher interest cost and strict performance terms.
In calculating how much you can afford, also consider whether the business will be able to fund the interest and principal repayments required by the bank. Medici Capital assists clients throughout Australia with finance and highly recommends you also check what's on offer.
Remember it's an asking price
Remember what the vendor, and their broker, is setting is the "asking price". It is often negotiable.
Check the price on the Medici Capital Pharmacy Market Watch service http://express.medici.com.au/marketwatch . It's a free service and enables you to quickly check if the asking price or capitalisation rate is fair and reasonable given the location.
Brokers, and vendors, have a vested interest in maximising the price and will often use all sorts of tactics to pressure you into doing the deal at their price.
As a buyer, you are "Buying the future cash flow" not the past of the business. Many pharmacies are and remain in decline due to changes in their area. Buying on the basis of historical results will mean you get burnt!
Be proactive
Take action! Be proactive and approach pharmacies you have knowledge of. Speak to your employer and work with mentors to identify opportunities that may not yet be 'on the market'.
Despite rumours to the contrary, there are lot's of businesses out there and some businesses do take a long time to sell. Great businesses sell quickly. However, good and small pharmacies can often be on the market for some time. Check www.practice4sale.com.au and consider a structured approach to the market. Also consider a junior partnership with a staged entry/exit plan (see previous PharmacyNews column). They are often win-win.
Who's looking after you?
Employ experts to look after your interests. Consider a buyer's advocate.
Due diligence must be completed regardless of how confident you are with the business. It is safe to assume that the seller will present the business in the best possible light and not highlight the problems. Most pharmacy vendors are generally honest, but it is a buyer beware reminder.
As a matter of basic principle, business brokers are bound to be honest and professional in presenting a pharmacy for sale. But they also have a commercial relationship between themselves and their clients (the vendor). They must present a business for sale in its "best light" without misrepresenting any significant facts but at the same time not pointing out all of the potential business pitfalls. Often this means they have an adversarial relationship with the buyer. Hence, always consider the source of information to be biased and the seller willing to "manage" the truth to get the best price.
All brokers will have a disclaimer on their reports.
Do the maths
Ultimately it's your money! Whether you are borrowing all the money or just most of it. You will be the one paying for it.
Do the maths:
- Check all calculations
- Assess the business growth and underlying costs
- Complete sensitivity analysis to see what the impact would be on you if interest rates increased by 1-2% or your gross margin declined by 5%. These are very possible scenarios in the current market climate.
- Check the figures against benchmarks for similar pharmacies.
- What can you do to improve the performance?
- Do your sums quickly as good businesses (and their brokers) will not wait around for you.
A few final thoughts - what more can you do?
- Start thinking like an owner.
- Build your business skills - get into courses.
- Build a team of advisors and mentors to help you identify and buy a good businesses as well as help you manage them when you finally succeed.
- Act on the weaknesses and support your decisions with financial analysis. Your gut won't cut it when you're buying a $2 million business!
- It takes up to 2 years to find and buy a good business. In many cases buyers wait more than 5 years. Act with caution.
Frank Sirianni can be contacted at Medici Capital, PO Box 80 KEW VIC 3101. Medici Capital, industry leaders in pharmacy valuation, finance & management consulting. Helping pharmacists achieve their goals. www.medici.com.au
The take-away
- Know what you can afford. Check with Medici Capital for a quick assessment.
- Ownership is not for everyone
- Professional competency does not necessarily mean you will be business or commercially competent
- If it is for you, and you have the required skills to make the transition from employment to ownership, its can be a fantastic journey of discovery, fun, and wealth. Assuming you pick the right pharmacy for you!
- Use Medici Capital Online Indicative Valuation available at http://express.medici.com.au to test the asking price.
- Self-evaluation and personal goal setting, like all things in life, is fundamental and critical. As is planning.
- Due diligence and business assessment are critical.
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