Selling a Pharmacy or Health and Beauty Store

What a buyer pays for in a pharmacy

The prescription file is the asset. A buyer wants to know how many prescriptions the store fills in a typical week, how many of those are refills from patients who have been coming for years, and how many come from a few nursing homes, clinics or prescribers. A file built on steady refills from hundreds of neighborhood patients is worth more than one that depends on a single long term care contract, because the contract can move to another pharmacy with one phone call.

Payer mix gets as much attention as volume. Buyers will ask what share of prescriptions are paid by commercial plans, government programs and cash, and what the store is reimbursed per fill after the drug cost. Reimbursement from the large benefit managers has been squeezing independent pharmacies for years, and some of that money is taken back weeks or months after the sale through fees the pharmacy did not see coming. A buyer who finds those clawbacks in the records will lower the price or ask for a holdback, so we would rather you find them first.

Gross margin on generics, brand drugs and specialty drugs will be broken out separately. Specialty and compounding work can carry better margins, and they can also bring regulatory attention, so a buyer will want to see that the store does either one carefully and has the training and equipment on file.

The front store and the beauty side

Front store sales are the part of a pharmacy that behaves like a normal retail shop. Buyers look at sales per square foot, the mix of over the counter medicine, vitamins, gifts, cards and convenience items, and whether the shelves turn over or collect dust. A pharmacy with a lively front store usually gets a better price than one that treats it as an afterthought, since prescription reimbursement keeps shrinking and the front store does not depend on a payer.

A beauty supply store, a cosmetics boutique or a supplement shop is closer to pure retail. The questions are about repeat customers, how much the sales depend on a few brands or distributors, and whether online sales take over what the store used to do. Some owners carry a salon line or a private label, which adds margin and also adds a question about who owns the formulas, the packaging and the supplier relationship. Get that in writing before a buyer asks.

Inventory is its own conversation in every one of these businesses. Pharmacies carry a lot of it, some with short dates, and buyers usually count it at closing and pay for it on top of the price. Expired product, returns owed to wholesalers and slow moving stock are all subtracted. A clean count and a record of what has been written off over the last few years saves a lot of argument.

Records a buyer will ask for

Expect requests for three years of tax returns, monthly profit and loss statements, and a balance sheet that includes inventory. For a pharmacy the buyer will add reports from the dispensing software showing prescriptions filled by week, by payer and by prescriber, the contracts with each benefit manager and wholesaler, and the most recent audit notices from any payer. Payer audits are common and they can reach back a long way, so a buyer's attorney will ask what is open and what has been settled.

They will also ask for the employee list with licenses, pay and tenure, the equipment and software list, and any leases on equipment such as the robot, the counters or the delivery vehicles. If the store delivers, buyers will ask how many patients depend on that service, because they tend to stay with whoever keeps delivering.

Our posts on getting financials ready and quality of earnings reports describe what clean numbers look like and why a buyer's accountant will test them.

What has to transfer

A pharmacy cannot be sold the way a hardware store can. The pharmacy permit, the state board registration and the federal registration for controlled substances usually belong to the owner and the location, and a new owner has to apply for their own. Rules vary by state and your attorney confirms what applies to your store. Timing matters, because a buyer cannot dispense until those approvals are in place, and some deals include a short period where the seller keeps operating the pharmacy under a transition arrangement. The buyer also needs a licensed pharmacist in charge, and many independent owners are that pharmacist.

Contracts with payers and benefit managers may not move with the sale, and in many cases the buyer has to enroll the store on its own. A buyer's lender will ask when that will be finished and whether reimbursement rates will stay the same. The lease needs the same attention as in any retail sale, and a pharmacy needs enough term left to justify the buyer's investment in the build out, the vault and the equipment. Our post on the lease as part of the deal explains how landlord consent tends to go.

Beauty and supplement stores have a lighter list, though the same ideas apply. Sales tax permits, distributor accounts, brand authorizations and any professional licenses held by staff who give treatments or advice may each need to be reissued or consented to.

What tends to sink a sale

The most common problem in a pharmacy sale is that the owner is the pharmacist and the patients came for the owner. A buyer who sees that will ask how many of them will stay, and we can usually only answer that with the refill history. Another is a payer audit that turns up after the sale was announced. A third is reimbursement that falls between the date of the offer and the date of closing, which changes the earnings the buyer based the price on.

On the beauty and wellness side, the usual trouble is a few brands carrying the sales and a distributor who changes terms, a lease with little time left, and shrinkage or write offs that were never recorded. Online competition affects all of it, and a buyer will ask whether the store has any online sales of its own.

Confidentiality is a concern in both. Patients, staff and the wholesaler who extends credit should not hear about a sale before the owner decides to tell them, and our post on how we market a business confidentially covers how we keep the name out of the listing until a buyer has signed a nondisclosure agreement.

Preparing to sell

Begin a year ahead if you can. Pull the prescription reports and look at them the way a buyer would, by payer and by prescriber, and find out what has been clawed back. Make sure the books match the dispensing system. Bring a second pharmacist into the building and let the patients meet them, since a store that runs without you is worth more than one that does not. Count the inventory and write off what should be written off. Talk to your landlord about the lease, and review every payer and wholesaler contract for what happens on a sale.

On the front store, clean up the shelves, drop the products that have not moved, and put the best sellers where people see them. Beauty and supplement owners should write down which brands and suppliers matter most and what the terms are, along with anything about private label or formulas.

We start with a valuation built from your own numbers, prepare the materials a buyer and lender expect, and screen buyers before they see the store. At Business Advisors of America we work with owners from the first valuation through the closing. If you are thinking about selling a pharmacy or health and beauty store, a short call with us is a reasonable first step.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.