The state of the union for current pharmacy owner finances, both personal and corporate, is best described as being a mix between “For Whom the Bell Tolls” and “The Sun Also Rises.”
by Mike Jaczko and Max Beairsto
No, we are not suggesting that Hemingway wrote two of his best novels with pharmacists in mind, but we are saying the following:
Many western economic countries have recently completed a 34-year decline in prevailing interest rates. As central banks around the world, particularly in North America, set their sights on “normalizing” interest rates, pharmacists and pharmacy owners need pay attention.
Predicated on cheap debt, many pharmacists and new pharmacy business owners have continued to accumulate significant debt loads at an accelerated rate over the past 10 years. Historically, interest rates have been artificially depressed as a response to the global credit crisis in 2008. Consequently, as retiring pharmacy business owners sell their stores to new owners, the complexion of independent pharmacy business balance sheets is steadily shifting from surplus retained earnings and cash balances to burgeoning financial debt and resultant leverage. First and second mortgages facilitated by vendor take backs, corporate car leases and maxed-out operating lines of credit provides the evidence.
Now, we are not predicting the end of the Canadian consumer economy or retail pharmacy businesses. We are suggesting the following: Regardless of whether you are an individual person, a corporation, a province (read: Ontario is broke) or a sovereign nation, if you continue to repeatedly spend more than you take in year after year, over time “the bells may begin to toll” regarding your leverage.
Modern economic theory insists that central banks must begin to normalize (read raise) interest rates from artificially depressed rates shortly, in fact the process has begun in our view. We don’t have a problem with this happening as long as the rates rise slowly over an extended period of time (years not months).
In 1993 interest rates in Canada moved from 6.93% to 9.93% in the span of three months. We are not suggesting that the economic circumstances of today mirror those of 1993, but we are suggesting that sooner or later someone is going to “take away the punch bowl”. Get ready because the day has come.
A fundamental premise in finance describes that all financial and real assets (by proxy) recalibrate every time there is a significant movement in interest rates. Bond (aka debt) math shows that every 200-basis point rise in prevailing interest rates, holding all other factors constant, results in a 17% decline in the value of a bond in order to keep principal and interest payments, namely debt servicing constant. In other words, as interest rates rise, bond investment values drop, the value of real estate funding by dropping bond values falls in unison. Finally, pharmacy business owners need to recognize that when it comes time to refinance your mortgage after the first five years of debt servicing, your debt servicing costs will rise as sure as “The Sun Also Rises.”
Mike Jaczko, BSc Phm, CIM® is a pharmacist by background, is a portfolio manager and partner of KJ Harrison, a Toronto-based private investment management firm serving individuals and families across Canada. For more information, email: firstname.lastname@example.org.
Max Beairsto, B.Sc. Pharm., MBA, CVA is a certified valuation analyst and business intermediary with Enterprise Valuators, an Edmonton-based valuation and business sales advisory firm. Their Pharmacy Edge division assists pharmacy entrepreneurs across the country needing transactional and valuation advice. For more information, email: email@example.com
By Mike Jaczko & Max Beairsto
In two earlier installments (part 1 and part 2) we identified six factors that drive the value of your pharmacy business. Here, we pick up where we left off.
#7. Competitive advantage
Your “monopoly of control,” as described by John Warrillow in Built to Sell, describes a concept that answers the question of how well your business is differentiated from competitors in your industry. Seth Godin, who wrote the Purple Cow, also laments on the importance of uniqueness and differentiation in your organization. Essentially, it boils down to developing a business where you have created your own monopoly; it is the only place where your customer can shop for your unique offering of services, products and courtesy.
The provision of unique value-added services and products is the glue linking your pharmacy business with your customers and patients. Creating some form of competitive advantage to prevent competitors from copying your activities will provide a “moat” around your pharmacy business. Some buyers will pay a premium for a niche that has barriers to competitive entry, but this can be a double-edged sword. If you have created something so far off the beaten path, it is sometimes difficult for a corporate buyer to envision your business in their fold.
Experts have identified numerous ways to create a competitive advantage, but some seem to resonate more for the pharmacy industry. Although trademarks and patents do not readily lend themselves to creating a competitive advantage for a pharmacy, developed processes, compound recipes, training programs, published articles, specialized licences or certificates, and service contracts do. Do not discount your location—and the security of your lease—as these can serve as a major barrier to entry for your competitors.
8. Patient/customer relationship
While the patient/customer relationship is somewhat related to competitive advantage, it is nevertheless deserving of recognition on its own. How likely are your patients to return to renew a prescription or re-purchase a product or, even better, refer friends and family to your pharmacy? The majority of your peers do not actively seek out or quantify the answer to this, but your corporate competitors actively pursue this information.
Stability, consistency, repeatability, reliability and sustainability are a few of the key attributes to establishing a meaningful customer relationship. Your quality marketing program needs to create name recognition (of both the business and key employees) and build customer awareness and loyalty. A long history of efficient operations, producing timely and accurate prescription output and complimentary professional advice, will drive a valuable reputation in your community.
While, the value of your business will in part, be related to the hard, tangible assets, it is the goodwill that constitutes the majority of the price a buyer will pay. Therefore, it is these softer value drivers that will help drive goodwill in your pharmacy business. Relationships and patient/customer habits remain the nectar of the valuation gods.
This article first appeared in Pharmacy Practice + Business.
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