Selecting Advisory Services for Selling a Pharmacy Business
How do advisors support a successful process from start-up through growth and in transitions? In this video, Ollin Sykes, CPA, discusses the role that pharmacy specific advisors play in helping you sell your pharmacy.
This video highlights the preparation that should take place a few years before a pharmacy is put on the market. Due to the high demand for buying pharmacies, you need advisors who will pay attention to and put in order about 3-4 years of clear accounting data in order to calculate EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). EBITDA is used to determine the value of the pharmacy to a buyer.
If you prefer to read this content, the video transcript is below.
Well, your team is going to include an accounting, financial tax expert, obviously, and we’ll get into that in just a second. Your team is also going to include a legal healthcare specialist, who knows, and can work hand in hand with your accounting advisor tax person. Those are going to be your two most critical folks that you’re going have on that particular team.
In today’s marketplace, we have more buyers looking to purchase pharmacies than we have sellers, because the boomers are not selling, they’re holding on for dear life, there’s too many pharmacy students coming out of pharmacy schools, and there’s too many pharmacy schools out there today. So, we’ve got an abundance of pharmacists, typically millennials, looking to buy a pharmacy. So, if I’m a boomer pharmacist, which is typically who we’re, excuse me, who we’re representing, I want to make sure first and foremost my books, my accounting system, my tax records are in order, because I’ve got to assume that the buyer on the other side is going to be doing their due diligence properly. That means having three, four years of accounting and tax data information in my QuickBooks file, assuming that I’m using QuickBooks in order on a full accrue basis, where you can accurately show exactly what’s taking place with that pharmacy, and that agrees with the tax returns that have been filed for the same periods of time.
Also, you got to have your script dispensing information from your main computer system there on the bench in order where it can provide certain pieces of data, like top 25 PBMs that are reimbursing you, maybe the top 15 drugs in terms of data volume. There’s a lot of reports that can be pulled out of those systems that somebody with experience is going to need to look at. But the main thing that you’re going to want to do, once you have the financial information in play, is to determine the appropriate close of the closest year end that you have is recast your EBITDA.
Your EBITDA stands for earnings before interest, taxes, depreciation and amortization. And what I’m talking about specifically is that if I as the selling pharmacist and I’m a boomer, access to process, I may have a package that’s $200,000 a year, I may have a package that’s $600,000 a year, and the package may include a cash balance retirement plan, it may include healthcare benefits, it may include cars, it may include travel, it may include W2 compensation, and other kinds of benefits that I’m receiving as a pharmacist, and if I’m not in that picture going forward, if you are the millennial buyer, you’re interested in how much cash flow’s going to be freed up by my exiting from that process, and you’ve got to be able to show that millennial buyer how much free cash flow that you’re going to have on top of what’s normally considered EBITDA, earnings before interest, taxes, depreciation, and amortization, because that a) is of tremendous value to you as a seller, number one, and b) is of tremendous value to the buyer because it then shows what the buyer can afford to pay and it also will show the pharmacy niche bank that hopefully the money your buyer is working with, what type of evaluation, again, this cash flow from this pharmacy can support.
The advisors can help you by making sure that your books in the order from a cleanliness perspective and from an accountability perspective, literally years before you begin this process, because this is not a one year process. This is something where you’re going to be looking, the buyer potential is going to be looking at three or four years of history, and they want that history to be clean, and they don’t want it to be, you don’t want to show 40 percent margins one year, 12 percent the next year, 18 percent the next year. They need to be showing some consistency, for example, where the gross margins are going to be, what the net income is going to be, how that balance sheet’s going to look. And your advisors, again that CPA that hopefully has that experience with pharmacies, knows how these numbers need to look, and again, that CPA can work very closely with your legal healthcare specialist and getting together that potential letter of intent that the buyer may be looking for. But this is an extremely important process here in determining exactly the right evaluation, the exact asking price, because if you can’t be financed, and the cash flow is not there, then it won’t work for either the seller, the buyer or the financier, as the case may be. So this is probably the most critical stage that the boomer, seller, needs to be prepared for and working with his advisors upon.
The information contained herein, is intended to be used, and must be used, for information purposes only. It is not intended to be a source of advice for accounting, tax, financial, investment, or other purposes, or for credit of financial analysis with respect to the material presented. It should not be used as a substitute for professional consulting. Before making any decision, or taking any action, you should consult a Sykes and Company, P.A. professional.