Don't pay the seller for what you bring to the table!
Emotion and fear are often the twin drivers for the purchase of a pharmacy. This is particularly so where a competitor is thought to looking at the same opportunity.

Brokers are very skilled at creating the 'pressure pot' for sales and a quick decision. They drive the emotional factor! They will often encourage the purchaser, "to never mind the reported results" and think about what "you could do with this business" and, as a result, have the purchaser pay a premium to the seller for value yet to be created by the purchaser.

Remember:

• The broker acts for the vendor
• They have a vested interest in the price paid
• They accept limited liability for disclosures and claims made (except for professional liability). Ask for evidence of their claims
• If it was easily done, the seller would have probably done it already (or tried and failed)!

Use a little common sense!
We are reminded of a recent situation where the buyer paid more than double the fair market value for the pharmacy to compete against an unknown "other bidder". What made him so sure there was another bidder?

Reduction in return on investment
Recent sales have confirmed a dramatic reduction in the effective return on investment for new owners.

Pharmacy return on investment has two components

1. profitability; and
2. capital gains.

The return is therefore driven by both the pharmacy margins (continuing to decline) and underlying growth (also in decline). In the light of both of these drivers declining, the effective return is also declining.

With the prospect of further increases in interest rates, the erosion of return will be compounded.

Is the pharmacy for you?
Frank Sirianni suggests that to determine which pharmacy best suits you takes 4 steps:

1. YOU
   How much can you afford? What type and size of business would you ideally prefer to own? Where do you want to be in 5-10 years and how will this pharmacy help you get there?
2. FIND alternatives available
   www.practice4sale.com.au, Brokers, and Wholesalers.
   Use these sources to check what's available. Remember to use a few sources to ensure you get offered the opportunities. If you can't find what you are looking for, LIST A PRACTICE WANTED advertisement on www.practice4sale.com.au
   Network and take direct action. You will need to approach owners and think laterally to seek out opportunities.
3. EVALUATE - a crucial step...but time is of the essence!
   Investigate the
   • reasons for sale
   • financial performance
   • resources required and return on investment
   • history of the pharmacy, character, ...and location, location, location
   Call Frank Sirianni or one of the team at Medici Capital on 03 9853 7933 or email info@medici.com.au for more information on valuing your pharmacy. Visit http://express.medici.com.au/valuation/ for a quick and easy independent indicative pharmacy valuation.
4. Crunch the DEAL
   This step involves both legal and accounting processes. But before you settle, DUE DILIGENCE is absolutely critical. If you were buying a car, you'd have it tested!

After you purchase the business?
As sales of most pharmacies include a goodwill component, it is normally important to put in place a handover period so that buyers are able to maintain and grow that goodwill. This handover period should be sufficient to ensure that the buyer learns the detailed operations of the business.

The four pillars of pharmacy business value
Assuming the pharmacy meets your personal desires, the next step is to assess the value of the pharmacy. The value is determined by the likely future returns (not the historical returns) of the pharmacy. History is used as a tangible indicator of what the future may hold.

Always look at the future!

Factors to examine include traffic drivers, proximity to doctors, trading hours, condition of the business (is a refit required?), and competition.
To assess business value I use the following 'pillars':

Pillar Includes:

• Business & Operational factors Lease (a secure lease is mandatory), Sales mix, Trading hours, Staff (skills & mix), Business 'quality', Layout & equipment, Stock
• Location, Competition & Deregulation risks Shopping centre, Population growth, Proximity to drivers & Doctors
• Financial Turnover, Growth, Rent, Expenses (inc marketing), Performance & sustainability, Variability
• Market & Economic risks Interest rates, Finance costs, Industry risks & economic conditions

In all instances, it is important to examine the business in detail and verify, where possible, the historical performance of the pharmacy. You should also look for factors which may have contributed to the recent results.

While adjustments are often required for 'non-arms length' transactions (ie payments to spouses etc) and an owner's salary, caution should be exercised in adjusted gross margin for what 'could have been'.

My approach is to examine these pillars in detail to assess the outlook for the business and identify the underlying risks associated with a particular pharmacy. Using this analysis, an appropriate rate of return and business value is established.

The fact remains, there is no association between the business value and its annual sales. Value is related to profitability, cash flow, and risks associated with the pharmacy.

Visit http://express.medici.com.au/valuation/ for a quick and easy independent indicative pharmacy valuation