After many years of numerous, highly successful, Long Term Care Pharmacy Sales, I always anticipate the first question that all sellers have. That is, “What Is My Pharmacy Worth?” All LTC Pharmacies have strong value, even when they are not very profitable. Buyers know that the need for LTC Pharmacies will always remain strong and secure. Your Pharmacy’s value and its anticipated Selling Price is driven by several important factors. Is this a market the buyer needs to be in, and can they increase revenues through turning on guaranteed New Business? Are the client relationships anchored by strong contracts? Can profitability be enhanced through the buyer’s operational skills, Rx purchasing power, and by the absorption of overhead into an existing footprint?
Once a buyer understands how they will benefit from a LTC Rx acquisition, they can determine the price they will pay, which is typically based on a multiple of the Pharmacy’s adjusted EBITDA and enhanced by the strength of its contracts. Typically, Pharmacies that have “captured beds”, meaning that the Rx contracts are held by facility owners who also retain interest in the providing pharmacy, will warrant the highest valuation with multiples in the 9-12 times adjusted EBTIDA range. This is because these contracts are the most secure. Nevertheless, most LTC pharmacies today can be assured that their selling price will be 6-8 times their adjusted EBITDA, regardless of whether they have captured beds or not.
After listening attentively to my clients, I have developed a winning formula that will allow you to take maximize your company’s worth and bring home the selling price you expect. This basic formula focuses on the essence of what all Long Term Care Pharmacy buyers desire, which includes simplification and clarity of data in vital areas.
1. Financial Data: Buyers want to review 3 years of Profit & Loss Statements and Balance Sheets. Personal expenses, non-recurring expenses, and those that are not applicable to the day to day running of the business should be eliminated. These “add backs” often include Legal, Travel, Personal Insurances, vehicles, entertainment expenses and other charges. This will present a tangible EBITDA position from which the selling price can be established.
2. Contracts: Contracts are vitally important because they are what the purchaser is ultimately buying. Contract duration, pricing agreement, maintenance of an acceptable and normalized exit [OUTS], and contract assumability are at the epicenter of the Sale’s Success.
3. Operational Data: This includes the software utilized and its attributes; packaging capabilities and the machinery utilized; robotic applications and how they benefit the operation; hours of operation; and delivery systems used such as a carrier service or one’s own fleet.
4. Types of Facilities Serviced: Buyers want to see the total number of beds broken down by facility type, such as SNF, ALF, Group Homes, Mental Health facilities, etc. Other important statistics are the time they have been serviced, bed count by facility, and distance from the pharmacy.
5. Medication Purchases: What companies are utilized, the Rx Purchasing Agreements, and the contract facilitator.
6. Facility Description and Location: Give an estimate of Size, basic operational layout, and lease agreement details. How does the location strategically enhance the ability to service facilities?
7. Personnel: Create a flow chart that details key and general employee responsibilities, as well as salaries and time employed with the company. Who is expected to stay on after the sale?
As I mentioned, once we have secured the above information, the Selling Price will be driven by the buyer’s need to enter a given market, the ability to “turn on” beds and increase revenues quickly, and the ability to absorb and consolidate overhead and maximize the financial benefits realized from the buyer’s existing Rx purchasing power. These factors coupled with the Sellers existing EBITDA are what ultimately establishes the best possible price.
David Feuer has been selling long term pharmacies for 30 years and is with American Healthcare Capital. He can be reached at David@ahcteam.com
This post is related to:Buying/Selling of a Pharmacy & Franchising