The goal of any pharmacy owner come tax time is to get their net income as low as possible to save on payments to Uncle Sam. Things listed as tax write offs are normal and every business does this including pharmacies so there is no shame in this game. It is a great idea, except when it comes time to find the real value of the pharmacy for sale. Having these items in the mix lowers the income for the pharmacy, making the pharmacy appear less profitable and in some cases unsellable. Therefore, it is critical before the valuation process to “normalize” the pharmacy’s income. Simply put, normalization is removing costs that a new owner will not have. The normalized income will show what the “real” net income would be for the new owner. When doing this process it is important to carefully document and explain each cost removed so the new net income can be substantiated to a potential buyer and funding sources. Here are a few examples of some of those items to normalize:
- Management Salaries – Paying yourself well? Then you need to find out what a normal salary would be for the new owners to replace you and operate the pharmacy effectively. Most independent owners “overpay” themselves, deservedly so, either through higher salaries, bonuses or distributions of some type. Adjust these numbers to what they will be for the new owner.
- Cost of Perks – Some current costs would not exist under new ownership. Things like the Porsche “delivery car” and automobiles for other family members, cell phones, gas cards, car insurance, home internet and office costs, etc. Oh, let us not forget the “branch office” in Aruba (i.e. vacation home) or other vacation and travel expenses that were used as write offs. What about the Country Club membership that is to “entertain clients” or “network”. We have seen this a lot and one client in particular stands out…after insisting this client review credit statements, he found $87,000 in restaurant charges for himself, family gatherings and outings with friends. One client was even running alimony payments through the pharmacy. Some of these may not seem right but it is important to keep in mind any expenses you are running through the pharmacy that the new owner may not have.
- Family members or others on the books who draw a salary or receive other benefits, but do not actually perform work for the company. Alternatively, perhaps they do actually work for the pharmacy but the salary is excessive for the type of work performed. Do not forget the dog and his expenses too… guard dog for security purposes, of course. Yes, we have seen this.
- Commercial rent or property costs – always adjust these to reflect actual market costs that the new owner would incur if the business premises were to be leased at prevailing market rates, as opposed to what you are currently claiming, which may be closer to say the rental rates in a city like Tokyo. This excessive rent is income for the new owner, which increases the value of the pharmacy for you.
- Owners benefits – Things such as key man insurance or personal term insurance. Are you piling cash into a whole life policy that generates high cash value you plan to use later for retirement? What about payments for 401k as well as pension or RRSP (Registered Retirement Savings Plan) contributions made by the pharmacy as part of yours or a family member’s compensation.
- Miscellaneous Items – Other items that will not exist under new ownership. What about the new heating and cooling system for your home that was claimed or the home security system and monitoring that are blended into the pharmacy’s invoice. Does the pharmacy pay for routine maintenance items at home like lawn services, minor repairs or car maintenance and repairs? Many other items can be added back that only you know were not part of pharmacy expenses that will not be obvious to others.
Careful normalization of the books can greatly enhance the value of your pharmacy when the time comes to sell. Ideally, you should begin backing out of some of these extra costs and get them off the books in the two years leading up to the date you are thinking of selling the pharmacy. It is perfectly OK if you have not done this since a professional pharmacy valuation expert can guide you in adjusting for these types of expenses. This should be in addition to other things you can do to increase profitability like inventory management and tighter controls on discretionary expenses as well. Normalizing properly can greatly enhance the value of your pharmacy generating a much higher selling price.
Why Choose PRS to Value and/or Sell Your Pharmacy
Selling your pharmacy is the culmination of a lifetime of hard work and does not belong in the hands of amateurs. If you wish to discuss your options with true professional pharmacy brokerage and valuation experts, please reach out to the pharmacy ownership specialists at PRS Pharmacy Services. If you decide to have us value and/or sell your pharmacy, we will assign one of PRS’s licensed Pharmacists with at least 20 years of experience valuing, selling and opening retail pharmacies to be your Project Manager. The Pharmacist Project Manager, along with our skilled support staff, will work with you every step of the way to take the stress out of, what can be, a very stressful process.
PRS is the ONLY pharmacy ownership and brokerage consultant endorsed by NCPA, the Federation of Pharmacy Networks and over twenty Buying Groups representing more than 15,000 independent pharmacies. Why? Unlike some companies that claim to be experts, we actually are, and our vast experience in a variety of unique situations make us the BRAND NAME in pharmacy consulting, compliance and brokerage. To date, PRS has sold, transferred, or opened over 500 independent pharmacies and has worked in all 50 states. We are fully insured, licensed and accredited. We invite you to compare us to our competition and see for yourself.
About the Authors:
Harry Lattanzio is a registered Pharmacist, a current Pharmacy Owner and President of PRS Pharmacy Services and has been helping independent pharmacies succeed for over thirty-five years.
He has spoken numerous times in front of top pharmacy and medical professionals both in the US and overseas on the topic of American pharmacy practice. He directed and oversaw the opening of PRS’s first overseas pharmacy and has consulted on pharmacy projects in Eastern Europe and Asia.
Harry was the recipient of the first Pharmacy Times Next Generation Pharmacist Award for Industry Advocate of the Year created to honor the future of pharmacy and the professionals who are defining it through their innovative professional practice.
Scott Weaver is a registered pharmacist and an Accredited Business Intermediary. His education and decades of experience working in and helping independent pharmacies would be invaluable to any new or existing pharmacy owner and a must have for any non-pharmacist business owner looking to buy a pharmacy.
He is the current VP of Pharmacy at PRS and conducts seminars for numerous trade organizations and groups every year. Including his talk on “How to Value a Pharmacy” at NCPA Ownership Workshop held three times a year.
Scott has successfully assisted hundreds of pharmacy owners over his 30+ years with PRS.