The fallout of COVID-19 is likely to cause a surge in consumer spending on health and wellbeing products and services.
This may consequently encourage a high number of entrepreneurs to consider buying a business in the pharmaceutical industry and inspire more people to own a drug store business.
Independent pharmacies once represented half of the pharmaceutical retail market in South Africa; however, now many are struggling to stay afloat. Independents are becoming owned or part-owned by retail giants such as Dis-chem, Medi-rite and Alpha pharm pharmacies.
The industry has suffered since the South African government implemented the Single Exit Price (SEP) in 2004. This is a flat fee system for dispensers – replacing the highly lucrative mark-up system – where the dispensing fees for prescription drugs were set at a maximum of 26% of the manufacturer’s selling price.
The introduction of the National Health Insurance (NHI) system, as well as the government’s plans to open a competitive state-owned pharmaceutical company, will affect independent pharmacies across the country – so, this could be a good time to exit the healthcare sector.
This article offers key advice on how to make your listing stand out by highlighting your business’s strengths, as well as tips on the best way to attract more potential buyers. There is also guidance on valuing your business and other sector-specific information to consider.
Highlight your selling points
Those that take the risk and invest in the pharmaceutical industry will be doing so with caution. After researching into the future uncertainty of the sector, buyers will be looking for a pharmacy that offers other income streams beyond prescriptions and standard medication.
Sales in preventative health care products – such as vitamins, immune supplements, health foods and nutritional drinks – are increasing. If your druggist stocks these products and you report healthy sale figures, this could motivate potential buyers to put in an offer.
Another selling point could be your staff; it takes time and money to recruit and train a reliable team. If your employees are keen to stay at the pharmacy once it changes hands, this could attract more buyers. You must give your staff adequate notice regarding the sale.
Make sure your pharmacy has curb appeal: repaint and replace any old signs and make the most out of your window displays. Carry out any necessary repairs inside your premise too: keep your shelves well-stocked, have bright lighting, and create a spacious store layout.
Organise your financial records for interested parties to review; this includes profit and loss statements, balance sheets and prescription sales logs. Some buyers may also ask to see a breakdown of prescriptions filled and reimbursed by public and private healthcare plans.
Hiring a broker – ideally one with experience in the healthcare sector – could help you attract more buyers. Most brokers will come with a list of contacts and can liaise between the buyer and seller with an impartial approach. You shouldn’t underestimate your network of contacts.
How much is your business worth?
There are a few methods you can use to calculate a realistic valuation. To value a pharmacy based on profit, you need to look at the earnings before interest, tax, depreciation and amortisation (EBITDA); a multiple of EBITDA – usually 5-7 – is used to determine the value.
Other factors will contribute to the value of your drug store, such as location. Is your pharmacy on a busy high street? Or next door to a doctor’s surgery? These drug stores are usually valued higher. The length and terms of the lease could also affect the valuation.
Are there opportunities to grow the business? If you can show that you’ve already invested in improving your pharmacy’s growth rate – either through new products or by entering new markets – you can request that your future forecasts are taken into consideration during the sale.
Speak to your accountant, financial advisor or broker to help determine a realistic sale price. Be cautious of overvaluing your pharmacy; if you do, your listing will sit on the market longer, which will put you in a weaker position when negotiating with potential buyers.
Other factors to consider
The SEP deterred many profit-hungry entrepreneurs away from the healthcare sector; however, the recent pandemic could result in an increase of independent pharmaceutical retailers, due to a likely rise in consumer spending on health and wellbeing products and services.
Timing the sale of your pharmacy is an important decision for any vendor. Ideally, you want to sell when your drug store is performing at its peak, and when the current economy and market is in a healthy state. It’s important to have a comprehensive exit strategy in place.
Big pharma retailers are posing serious competition to independent drug stores; if you offer personalised and tailored products and services, this could give you a competitive edge. Highlighting growth areas for your business opportunity could help you secure a high price.