Despite the numerous threats and pressures facing pharmacy, Goodwill is and remains at an all time high. By any measure the cost of pharmacy ownership is high and the payback period greater than in recent history. So too are the associated risks of pharmacy ownership.

However, the returns for wisely selected pharmacies can be excellent and the rewards, both personal and financial, can be exceptional!

Recent sales evidence suggests a number of warning bells which I wish to alert you to.

Put simply, many pharmacists are being hoodwinked into paying too much for pharmacies without exercising due care. This column provides analysis to demonstrate areas of concern and methods to identify a sound risk adjusted value for pharmacy.

Warning bells
Frank Sirianni and our team, and indeed many pharmacy lenders, have become increasingly concerned at the:

1. Number of pharmacy purchases being made without any due diligence;
2. Varying quality of disclosure provided by vendors and their business brokers/agents;
3. Sales of pharmacy being driven by emotion or where the purchaser has paid a premium to the seller, for value yet to be created by the purchaser; and
4. Dramatic reduction in the effective return on investment.

While these are warning bells that have appeared in a minority of pharmacy sales, their increasing regularity must be addressed by the market place.

It must be stressed, this not universally the case. However, anxious buyers often overlook getting the details right and become saddled with mounting debt and a dubious investment.

Buying a Pharmacy - Location, Location, Location
What are you buying? The future cash flow of the pharmacy and the most important factor driving the future performance of the pharmacy is its location.

The desirability of a particular location also needs to be assessed in the light of your own personal objectives, expectations, and goals (including your preferences regarding professional conduct and pharmacy). It may also highlight areas of possible risk and competition.

While you may chose a pharmacy for lifestyle reasons, this may not be reflected in its business value.

Due diligence
The importance of this step cannot be over emphasised.

With many pharmacies approaching significant prices, and with the increasing competition risks, all information must be checked and verified.

Due diligence involves checking:

• Salaries and payments to associated parties
• Evidence and support for add-backs for valuation purposes
• Ownership of the business, assets and equipment 
• Complete inventory of assets, fittings and equipment 
• Term of lease of premises 
• Value of the business name 
• Is equipment leased or hired 
• Obsolete inventory 
• Stocktake rules and timing 
• Duration of existing customer contracts.

Ultimately, how much of the business will transfer to you? What agreements are in place to guarantee the future success of the business? Group membership, Staff & employment agreements, Agencies, Nursing homes, Lease & tenure.

Alternatively, how much of the performance of the pharmacy relies on the owner and his/her personal goodwill?

The due diligence should be completed by an independent adviser or accountant with expertise in pharmacy. Do not use the same accountant as the vendor. While, protocols may be adopted to separate the process, the process must be transparent and independent.

The varying quality of disclosure provided by vendors and their business brokers/agents;
The quality of information and disclosure provided by vendors and their business brokers/agents varies widely across states and between business brokers/agents.

A broker generally prepares a detailed Disclosure Document which includes a summary of information that a buyer will need to know in order to decide on the business and the best price to pay.

These vary in quality throughout Australia.

Potential buyers should want to see recent financial statements and financial projections and cashflows.

The buyer may require warranties in relation to the business, including the accuracy of information provided and the absence of legal claims.

Buyers should seek information to determine the future outlook for the pharmacy. As a minimum, the disclosure document must have:

• 2 years financial information about the pharmacy (preferably 3)
• A minimum of 24 months of monthly information to enable the identification of sustainable business trends and variability
• Details of staffing and hours worked by owner to enable the measurement of ongoing operating costs
• Information pertaining to the premises lease including options, transferability, and escalation over the next few years
• A broad outline of the key business drivers and sales mix

Failure to provide a reasonable level of information, should sound warning bells.

Information provided should be complemented by the buyer's site visit and own inspection of the pharmacy.