Warren Buffett has been quoted as saying, “Price is what you pay, value is what you get.”
We have written countless articles providing direction on how to arrive at the theoretical price when selling your pharmacy. Now we focus on the importance of paying attention to the factors that drive the value of your pharmacy business. The benefits are two-fold: if you pay attention to the factors that improve the cash flow of your business, you will make more money and, someday, when you do decide to sell, your pharmacy business will be worth more.
Over a series of articles, we are going to focus on 10 different pharmacy-specific drivers that will add value to your pharmacy business. After all, valuation is not about determining what you pharmacy is worth; it is what that next guy is prepared to pay! Marketing your pharmacy is a process in “price discovery,” so look at these value drivers as a guide to help you evaluate your pharmacy business through the eyes of a potential buyer.
Think of a value driver as merely a characteristic of your pharmacy business that either reduces the risk associated with owning the pharmacy business or a component that enhances the prospect that the pharmacy business will grow further in the future. Of course, the corollary is the greater the risk, the less a buyer is prepared to pay.
The better your pharmacy business scores in the 10 areas that we plan to cover, the greater the probability that it will make you more money while you own it and will garner more interest and a higher sale price when you go to sell it in the future. The end result will be that your pharmacy business valuation will garner a higher earnings multiple.
Remember: Value = cash flow x earnings multiple
#1: Financial performance
Cash flow is king. Everything you have worked for boils down to how much cash flow your pharmacy business generates year-over-year on a predictable basis. A predictable pattern will garner a premium price when selling. It is all about “risk.” The lower the risk of losing the cash flow in a transfer of ownership, the higher the value to the buyer.
It goes beyond stability of the earnings, however; the cash flow from your pharmacy business needs to be both substantial enough to attract a buyer but proportionately in keeping with industry norms. The absolute value of your cash flow should be over a certain threshold to entice the buyer and allow him to withstand market fluctuations. Your cash flow as a proportion of top-line sales should also be commensurate to your peers.
#2: Growth and scalability
Acquirers typically pay the most for businesses with the greatest growth rate and potential to grow. In rare cases, an acquiring company may even buy a business that scores high on growth potential but low on other attributes because the acquirer sees a way to leverage some of its own assets to help the business grow much more quickly than it could under its current owner.
#3: Recurring revenue
Businesses with recurring and predictable revenues are the number one greatest creator of wealth for astute pharmacy business owners. Businesses that create recurring and predictable revenues will always attract interested buyers. This is why pharmacy business owners are often able to sell their practices on retirement for considerably more money than when a doctor or lawyer attempts to sell his/her practice. We refer to such practices as “zero-based” revenue businesses.
Buyers are willing to pay more when their perception is that the cash flow of your pharmacy business is substantial, predictable, growing and recurring.
In our next article, we will discuss the role of “concentration risk”—why reliable financial information plays an important role in your valuation and how important it is to “you-proof” your 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: [email protected].
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 protected]