25 Sep buying a pharmacy? why due diligence is critical!
Posted at Sep 25, 2019 6:54:04 PM in articles by yield advisory
Whether you are purchasing your first or fifth pharmacy, it is a significant investment, especially given the high value of pharmacies in Australia. Your priority is to ensure that you are making the right decision, whilst reducing risk and not overpaying for the pharmacy asset.
What is Due Diligence?
A due diligence is an investigation of your potential new pharmacy to confirm all the information that is being presented is accurate. The due diligence is undertaken after the purchase contract is signed and it is a special condition that needs to be satisfied prior to the contract becoming un-conditional. It is particularly important due to the fact that most pharmacies are valued on a capitalisation of future maintainable earnings (FME) basis as highlighted below:
Valuation of Pharmacy= FME x Capitalisation Rate
FME – is the net profit of a pharmacy adjusted for one-off, non-recurring, normalised and private expenditure.
Capitalisation Rate – is determined based on the type and location of the pharmacy.
Generally, city-based pharmacies would have a 5 – 6 times multiple.
If the FME section of the valuation is inflated due to the financial numbers being mispresented, this can have a material impact on the valuation of the pharmacy and hence emphasises the importance on the due diligence process. With over 15 years experience in the pharmacy industry, we know which areas of the pharmacy you should be investigating and the right questions to ask.
At the completion of the due diligence assignment, we will present you with a detailed report of the findings of our investigation and discuss the implications. This process can often result in us requesting a price reduction from the seller or in fact advising our clients not to continue with the purchase.
What are the benefits?
A due diligence will provide you, as the buyer, with confidence that the price you are paying for your pharmacy reflects the true value of the pharmacy. We will ensure that you are not overpaying and that you are aware of any potential risks involved in the business.
If you are interested in purchasing a pharmacy, ensure you get in contact with our team to undertake a due diligence investigation to arm you with confidence.