Shrinking reimbursement, rising DIR fees and other market factors have muddied the business outlook for many independent pharmacies. If your pharmacy is struggling and you’re wondering what to do next, the first thing you should focus on is staying calm and objective. Whether your cash flow is in crisis or you’re simply ready to retire, it’s time to add clarity to the situation, especially if profitability has been slipping over time and your stress levels are high.

Put yourself in a potential buyer’s shoes: Would you take a chance on an acquisition with uncertain future profitability? Probably not. In fact, a buyer who’s unsure of when a downward spiral will end would more likely offer a discounted price at best rather than pay a premium to the seller. As they say on Wall Street, no one wants to catch a falling knife.
Taking an objective look at your store’s performance enables you to course-correct where possible to either continue on in a more profitable way or maximize your opportunities of selling your pharmacy to an eager buyer before entering negotiations.

 

What to watch

It always pays to be vigilant about financial and operational performance. Take action if you see persistent signals such as declining sales, gross margin and net operating income; increasing payroll costs as a percentage of sales; low inventory turns; and high numbers of days outstanding for accounts receivable and accounts payable.

These danger signs must be promptly addressed before they become insurmountable. As a rule of thumb, look for some indication of improvement within one quarter of the fiscal year. Compare quarters year over year (Q1 of 2020 vs. Q1 of 2019) instead of consecutively to avoid misreading seasonal fluctuations.

Pay particular attention to the following four indicators:

• Profitability
  Gross margin and operating income are the key metrics for tracking store profitability. The industry average for gross margin is just under 22 percent, while net operating income averages slightly above 2 percent.¹

• Productivity
  Pharmacies are labor intensive, so you need to know what to measure in order to maintain appropriate staffing levels and control payroll expenses. Payroll as a percentage of sales should be around 13 percent.²

• Financial position
  Track how the investments you’ve made in your pharmacy have contributed to profitability (commonly known as return on investment or ROI). For every dollar invested, your store should generate about 17 cents in operating income—an ROI of 17 percent.³

• Cash flow
  Obtain a clear picture of money coming into and out of your pharmacy. High positive cash flow foreshadows business growth, setting the stage for new investments such as hiring new employees or opening another store location. It’s one of the most heavily weighted factors when calculating the value of a business. Pharmacies generally sell for 3 to 3.5 times cash flow. Inventory, accounts receivable and accounts payable are the primary pieces of cash flow. Inventory, your most important asset, should average around 11 complete turns per year. The “quick ratio,” liquid current assets divided by current liabilities, should fall in a range of roughly 1.3 to 1.4.⁴
  
  

Looking out on the horizon

Independent pharmacy owners who sell their store for a premium typically gauge the health of their business on an ongoing basis and always have a strong grasp on where they stand. They use hard data from financial statements and extrapolate how conditions are trending over time. They also analyze wholesaler reports that identify cost savings, growth opportunities and potential profit leaks.

However, aside from those numbers, it’s also crucial to stay connected with your patients and prescribers so you know whether your pharmacy is meeting their expectations. For example, one long-time pharmacy owner who was planning to sell his store had stopped actively marketing to prescribers. Meanwhile, one of his top-referring and most profitable physicians retired without warning and caught the pharmacy owner off guard. The sudden loss of referral income had a dramatic adverse impact on the pharmacy’s value.

On the flip side, another pharmacy owner planning to sell continued to call on prescribers and uncovered news about an urgent care clinic opening nearby. This owner chose to hold off on selling so he could grow his business with these new referrals and later realized a much greater pharmacy value than originally anticipated.

The key here is to be proactive about optimizing your business, especially if you’ve been asking yourself lately, “Should I sell my pharmacy or stay the course?” Whether you’re interested in retiring or improving your financial situation, begin forming an exit strategy three to five years in advance of your target date. Start by verifying the accuracy of all financial reports, identifying your discretionary expenses and sprucing up the store’s appearance from the parking lot to the front end all the way through to the shelves behind the prescription counter. Most importantly, stand ready to prove that your profit-and-loss statements align with your tax returns and be prepared to answer questions about all facets of the performance of your business.

In the final analysis, a buyer will pay the pharmacy’s current market value, and the best time for selling your pharmacy is when it’s operating at peak financial performance and there are no untapped opportunities left on the table. If you measure and monitor the health of your business now, while making necessary adjustments along the way, you’ll be ready to sell when the time is right, and you’ll be rewarded for exiting the business on top.