The State of Pharmacy Buying and Selling | Sean Duffy, Integrity Pharmacy Consultants

This transcript was generated automatically. Its accuracy may vary.

[00:00:12] Mike Koelzer, Host: Sean, for those that haven't come across you online, introduce yourself and tell our listeners what we're talking about. I

[00:00:20] Sean: name is Sean Duffy. I'm the owner of Integrity Pharmacy Consultants. We work with independent owners [00:00:27] and introduce them to other owners. That are either interested in buying or selling a pharmacy. I thought we could talk about some of the changes that we're seeing in the industry from a buying and selling perspective. We talk to a ton of [00:00:42] pharmacy owners every week.

[00:00:44] Mike Koelzer, Host: Sean. I think that whenever you talk about change, COVID always comes into the equation. Let's throw that in there. Do you think there's been any change in the industry as far as buyers and [00:00:57] sellers because of the shutdown and things like that?

[00:01:01] Sean: I do not. I don't think there's been an increase either. I do think that Covid, initially a lot of owners were really scared their prescription volume was [00:01:12] dropping. People weren't coming in. But in hindsight, it turned out to be a blessing for a majority of the independent owners because with Covid brought, immunization brought testing capabilities and opportunities [00:01:27] that had a very high gross margin.

Some of it a hundred percent 'cause they were given the vaccines for free.

I just think it helped carry owners through a tough time. And the p p P loans, everything that comes with it, [00:01:42] it was actually a shot in the arm. For independent pharmacy, which was desperately needed. But now we're kind, coming off that honeymoon phase where we don't have all of that high gross margin and some of the other opportunities we had [00:01:57] before.

But I guess I don't see an increase of buyers or sellers or people getting into pharmacies because of covid. I see c o. Being able to sustain some owners that may not have been able to stay open [00:02:12] up until this point. It gave them a little bit longer to go.

[00:02:16] Mike Koelzer, Host: Besides the financial part of it, do you think just the , change in life brought any changes to the market as far as, maybe people didn't have as much time [00:02:27] to think about a sale or maybe they had more time to think about a sale, that kind of stuff.

Do you think that's changed anything in the market, or is the answer to that? No, again,

[00:02:36] Sean: No, guess me personally, I haven't seen that. What I have seen [00:02:42] though, it changed a lot of people's perspective on actually wanting to be a retail pharmacist. Going into C O V I D, we were at a point where the supply of pharmacy. Was exceeding the demand for [00:02:57] pharmacists and pay rate in some of the retail chains out there was actually going down quite a bit from what it was.

But then Covid came along and it was a very high stress environment.[00:03:12] Pharmacists having to go into work talking to these sick people that had covid and it was just very stressful. And we saw and still see a lot of pharmacists that have left retail pharmacies, where they've gone.

I'm not [00:03:27] really sure, but we've got a shortage of pharmacists and there's some huge sign on bonus. Is out there in some places just to get people to keep the pharmacies open.

[00:03:37] Mike Koelzer, Host: I lose track of sign-on bonuses 'cause I'm not in the market for [00:03:42] that. But that is kind of an indicator of where things are going.

[00:03:45] Sean: Yeah, I've seen a, I've seen a sign on bonus. For a hundred thousand dollars for a two year commitment, which is crazy. 

[00:03:53] Mike Koelzer, Host: What have you seen in general, Sean? How's business [00:03:57] in the buy, sell world?

[00:03:58] Sean: Pharmacies are still changing hands. There's still new people opening pharmacies. We haven't seen a net difference, a large net difference of the decrease of pharmacies. So

If some are [00:04:12] selling or closing or selling their files to a chain, we have others that are opening up pharmacies to, to fill that void.

I have seen a slowdown here of late, and I'm not sure. If it's [00:04:27] because of the higher interest rates that have really become pretty significant compared to where they used to be. I don't know if that's part of it. I don't know if it's because of the people being unsure on what the. Double d i r hits gonna [00:04:42] do at the beginning of 2024.

Trying to weather that out and see how they come out at the end and maybe just play it a day at a time. I don't know. I have seen the transactions decrease a little bit [00:04:57] over the last six months.

[00:04:59] Mike Koelzer, Host: I think in general, to be a smart buyer, they say don't buy it really on potential. You never know what's gonna happen with something. I know what we're doing for 2024, there's gonna be some [00:05:12] changes in Michigan and so on, and I'm kind of like, eh. Kinda like a poker hand. I'll stick around for the flop kind of thing. I think for us, we're not in the market to sell right now, but I think if I was, I might hold off a little bit just to kinda know what's out there.

And then [00:05:27] 2024 comes around and not much has changed or gotten worse. Maybe that's where you'll see some more change.

[00:05:34] Sean: I do see that, I see a lot of people indecisive. They want to see what's gonna happen. There's also a lot of legislation out [00:05:42] there that's either recently passed or in the process of being hopefully passed. But it just takes time to see any results from these new laws going into effect that actually will help independent pharmacies and take away some of the control [00:05:57] from the PBMs 

that are crushing profits right now.

[00:06:00] Mike Koelzer, Host: Yeah, my listeners hear it over and over, but there's someone on our team that is excited about 2024 coming, 'cause Michigan's going through a bunch of changes my [00:06:12] message to this employee is don't hold your breath because the P B M seem to be one step ahead of things. But I think one benefit of it is that if you've got a legislator you're trying to meet for breakfast or whatever, or send them a note, it's [00:06:27] easier telling them about the predicament. With the PBMs and so on when there's three or four steps instead of when there's eight steps and a bunch of smoke and mirrors between them. So I think it might be a good step to clear some [00:06:42] of this up, but we'll have to wait and see what actually happens on January 1st.

[00:06:48] Sean: Yeah. Some of the states like California charged a fee for service. Service in their Medicaid. And I think that kept a lot of independence [00:06:57] from wanting to sell or going out of 

business, 

so they're getting $13 a script on Medi-Cal, and that really saved a lot of pharmacies, especially in some of these rural low income areas where they had a high percentage.

So as things change, I think it's [00:07:12] possible. And, I think there's some owners just holding on hoping that they turn the corner and get there. The one thing I would caution somebody though is to be aware of the one more year syndrome. And what that is if you're getting close to retirement, you think I'm [00:07:27] gonna really change my business.

I'm gonna buy drugs to have better profits. I'm gonna advertise more. I'm gonna bring in more scripts.

 When you get older in life, towards the end of your professional career, the energy's just not there and it just never [00:07:42] happens. So that one more year syndrome turns into another year, 

and slowly 

your business is degrading.

So be careful about that. In, fairly decent energetic health and still able to go after it, then I guess we'll see what [00:07:57] happens.

[00:07:58] Mike Koelzer, Host: Sean, I know there's a big expanse of the average age of. Buying in the average age of selling, but if you could figure out that average, [00:08:12] what would be the average age of buying versus the average age of selling?

[00:08:17] Sean: So I would say that. Average age of buying is probably, I [00:08:27] would call it 40, because we have people in their thirties, forties, and fifties.

And we still have owners in their sixties looking to buy and a couple in their seventies that just don't ever wanna leave pharmacy. But I would say the overall average for [00:08:42] buying is 40.

And I would say the average age for selling is probably, it's probably lower than you think. I would say 55 to 60 is the average age, [00:08:57] because you've got some younger owners that are just either, either tired, Or they wanna take advantage of, getting a decent profit for their pharmacy now and not waiting to have the business [00:09:12] go down.

You've got some owners, they have a great opportunity they decide to get out

[00:09:18] Mike Koelzer, Host: If you could put a feeling on [00:09:27] a graph, what. Emotion would show the biggest change over the last, let's say five years, it might be depression or anxiety or anger or whatever. [00:09:42] 

[00:09:42] Sean: yeah the one thing that comes to mind is frustration. When we go in and talk to owners and that's how we meet owners. We typically stop by the pharmacy and introduce ourselves. So during that conversation, by [00:09:57] far the biggest thing that comes up is the reimbursements.

The PBMs 

For the most part that is to blame for everything. That's the biggest challenge and that has grown exponentially over the last [00:10:12] five years. Part of that is anger. Part of that is maybe depression a little bit.

 Because they're working so hard, they're not able to spend as much time with their family as they'd like. And they're just having to work [00:10:27] harder to earn the same amount of money that they might have the year before.

frustrations that by far the number one word or adjective I would use

with pharmacist emotion right now.

[00:10:39] Mike Koelzer, Host: Here's one that I think really sucks [00:10:42] is there's a lot of owners that, because of the low reimbursement, especially when it's disguised as a D I R fee that if you had a business that was just going down, I don't know you're cutting lawns or something like that, and all of a sudden you [00:10:57] only have 50% of your business at least that frees up some hours to do something else, whether think of a new business or spend time with your family or whatever.

 pharmacies though can think they're doing better with more prescriptions and doing better with more customers, and [00:11:12] sometimes it's just quite the opposite, and that's frustrating. Of course.

[00:11:16] Sean: Yeah, I walked into a pharmacy last week and the owners have cut away three or four of the bigger plans in town because on average they were losing [00:11:27] money. They looked at it over a

quarter, and their average reimbursement was negative for spending all the time, the supplies, labor. But because of that, now they're only filling 250 scripts a week and.[00:11:42] 

Even though they're probably at the same profitability they were, with the lower volume and everything else. It's just. I don't know.

[00:11:49] Mike Koelzer, Host: It used to be that, even if you looked at the plans you said we're gonna keep it, it's really low on this plan [00:11:57] over every prescription averaged out, but because of a certain reason, we're gonna keep it because. It might draw in the family, or am I drawing a neighboring business?

Whatever. There were reasons where you, Were trying to play games in [00:12:12] your head to, to justify it, but after getting burned so many times you truly just look at it, and even if it is a big player, it's just not worth it.

[00:12:24] Sean: and it's difficult to find that balance right at what [00:12:27] point in time do you just cut it off and, because when you lose patients coming in for scripts, depending on how big your front end is, You're gonna lose front end business as well.

[00:12:36] Mike Koelzer, Host: Things like that. You did, because, you thought the front end was there still, or you want to [00:12:42] be known as being all service and things like that, but eventually, it can never catch up,

 Sean. The average buyer that's going into a pharmacy do they seem to [00:12:57] have quite a different plan? Years ago you would just buy a pharmacy and you'd switch hands on keys, and that might be the only change you made for better or worse [00:13:12] however, now most of your buyers, it seems like they're gonna have to make. Bigger changes than they did in the past than just changing the key. Are you seeing that you are seeing people coming in and [00:13:27] maybe doing the status quo? Which is fine if your numbers are there, if you can do the status quo you're good.

Are you seeing a difference in buyers and their expectations of how much they're gonna have to change or not?

[00:13:38] Sean: Yeah, so we're seeing more [00:13:42] non operator buyers than we used to see before. In other words, we're finding buyers that have multiple stores and they're buying a store not to work at themselves but

to add into their [00:13:57] portfolio stores to help reduce their cost of goods sold, help with some of the insurance reimbursement.

And when they do that, they've got their own business model that they wanna put into it.

 let's say there's not much delivery they're gonna come [00:14:12] in and they're gonna do a ton of delivery because they've figured it out.

they're gonna bring in the things that they found out works well for them, and that's why they're continually buying because they found a business model that works.

[00:14:24] Mike Koelzer, Host: Do you ever sell to [00:14:27] somebody that is, let's say a conglomerate that they buy but then they've bought in another state or another business climate? Have you seen much of that when these people come in that there may [00:14:42] be flabbergasted?

How come it didn't work this time when we did this last time?

[00:14:46] Sean: We typically do not see that. I haven't seen it anyway, and I think the reason is because some of these buyers, Are more [00:14:57] educated and they do their homework and research before they buy. So they know what states are regulatory friendly and not regulatory friendly. They know states where Medicaid has better [00:15:12] reimbursement or doesn't have better reimbursement.

Also telepharmacy regulations, what states are easier to put in a telepharmacy versus what states don't have telepharmacy as part of their regs or have more restrictions. [00:15:27] So a lot of the buyers that we see in these groups, they've already done their homework, their research, and they know where they want to go.

[00:15:35] Mike Koelzer, Host: What's the rule on ownership? I seem to think Michigan, 25% of the pharmacy has to be owned [00:15:42] by a pharmacist. Does that sound right? And does that differ from state to state?

[00:15:46] Sean: It differs from state to state. It does not surprise me. That's the way that Michigan is California, I know 51% of the ownership has to [00:15:57] be by a pharmacist, and this is new in California, you cannot be married to somebody that's a physician. 

[00:16:05] Mike Koelzer, Host: Really,

[00:16:07] Sean: Yeah, I've, I'm dealing with somebody now.

They currently own a pharmacy [00:16:12] and they actually want to move the pharmacy somewhere else. But to do that, you basically have to go through a new pharmacy application. It just takes you down a different tangent. But because he's [00:16:27] married to a physician, They're not gonna prove the change of address because they don't allow you to be married to a physician.

that's how tough

it is. 

[00:16:37] Mike Koelzer, Host: It's funny for me that's California. 'cause I'm across the country. I don't know what the hell goes on in [00:16:42] California. Just accept that it's more on the liberal side. And they've helped in getting same-sex marriages and all that kind of stuff.

No comment on that. I'm just saying that they don't do pharmacists and physicians. It's just funny for me.

 It's interesting with [00:16:57] that law because I think, I ain't no attorney, but I think that there's some laws about you don't have to turn your husband or your wife in you don't have to, testify against [00:17:12] them and things like that. So I guess

that would get pretty hairy maybe if you had a, doctor and a

physician married to each other.

[00:17:20] Sean: Yeah, I don't know, to me it's over the top. I think at the state of Texas, you could be a physician own a pharmacy.[00:17:27] 

 I don't think they are restricted. So it's all over the board, all over the United States. I haven't found anything

That's consistent among the states.

It's all depends on what the state drew up as part of their regulations.[00:17:42] 

[00:17:42] Mike Koelzer, Host: You probably have some of these groups that might wanna stay in state lines because of rules and because of licenses and things like that. Do you find that's a natural [00:17:57] barrier for some people, or do they not care too much about

that?

[00:18:01] Sean: No they actually do so we'll get a lot of referrals from buyers, from attorneys and the attorneys already, they're typically pharmacy attorneys[00:18:12] pretty educated on the different regulations within the state. And they'll give these buyers a suggestion of what states to go into, and there'll be a definite list of states not 

to go into.

Just because it's tougher. [00:18:27] The regulatory, especially when it comes to compounding, right? Some states are really hard. Some states are pushing for the s p 800. Some really aren't gonna hold the pharmacies accountable for that. it all depends. 

[00:18:39] Mike Koelzer, Host: How long have you been doing this now, [00:18:42] Sean? 

[00:18:42] Sean: Eight and a half years. Has it been nine? It's either eight or nine years. Some, somewhere in there, 

but a bit. 

full time. 

[00:18:50] Mike Koelzer, Host: How is your mental state? It seems that you deal with some people that this is a big, happy thing. I [00:18:57] guess most buyers are relatively happy or else they wouldn't be doing it. Some of the sellers may have had it. Does any of that run off of you?

 There's so much angst in the industry. Do you feel that, or are you removed enough to just, say I'm [00:19:12] helping, I'm, doing my best

kind of thing. 

[00:19:14] Sean: If, in situations where we do sell to a chain, me personally, I don't like doing that. I don't like taking an independent out, but. We've exhausted all other means of trying [00:19:27] to find an independent buyer or there just wasn't enough cash flow or profitability to interest anybody.

 You look at it as a positive that at least that option was there for these 

owners

Because not every [00:19:42] pharmacy is sellable. I'll tell you that right now. If you've got a lower volume pharmacy, especially in a rural area that somebody may not wanna move to and there's not enough money and the state has an approved [00:19:57] telepharmacy it could be a real beast to try and find a buyer for that.

And I'm going to go to 

Georgia. 

I had a pharmacy in Georgia that had been in the same location for 60 years. One of [00:20:12] the doctors moved out of town just because the town really wasn't growing. So they were only doing maybe 600 scripts a week. He was pretty close to cash flow neutral, but we couldn't find anybody to buy his [00:20:27] pharmacy and there wasn't another pharmacy within 15 miles, 20 miles of him.

So it was either shut the pharmacy down or just continue to operate at a net neutral. 

And he didn't want to be there anymore. Whereas if the [00:20:42] state had approved telepharmacy, this would be an ideal situation to keep medications going to the community to where they didn't have to travel, 15, 20 miles to get to 

another pharmacy. 

[00:20:53] Mike Koelzer, Host: So in a situation like that and people [00:20:57] say well, you know, you can sell your files. How valuable is that file when it seems that a chain might be savvy enough to have their eyes on [00:21:12] that knowing that maybe they don't have an easy out and then can go lower

on things or do some not even wanna buy that, they figure they're just gonna get the files anyways.

[00:21:23] Sean: It's unfortunately been the latter [00:21:27] recently. So the chains have really been tightening up on what opportunities they look at

and. They try to stay away from low volume opportunities for a couple reasons. First of [00:21:42] all, it really doesn't make a huge improvement to the store if it's a low volume store.

And then they factor into the amount of work they have to go through with operations, with acquisitions, with inventories with [00:21:57] finance, it's just not worth it to them. And if they do, they'll really low ball it because they say, listen, the only way it works for us is to pay you this amount of money.

'cause we've got a lot of other expenses into this. The data conversion, [00:22:12] they gotta figure that, going into two point info works or

whatever it is. 

And right now Some of the chains are just not aggressive at all. It's just the new direction from their leadership.

They wanna [00:22:27] spend their 

money other ways.

[00:22:30] Mike Koelzer, Host: What's the rule of thumb? I know it's complicated and you're writing a whole damn book on this, but what's the rule of thumb? How bad does a pharmacy have [00:22:42] to be that they're not really on the market?

Maybe they can sell assets, but there's no

value in the moneymaking process of it.

[00:22:56] Sean: [00:22:57] As far as script count, I would

say once you're at 300 scripts a week then it gets challenging for the chains. And from an independent buyer perspective, I doubt you're doing [00:23:12] any positive cash flow.

I doubt there's a way to. Pay a pharmacist's full salary and rent and everything else, just fill in, less than 300 a week. So from an independent buyer perspective too that's really tough.

[00:23:26] Mike Koelzer, Host: [00:23:27] Somebody might be buying a job but that might be about it.

[00:23:31] Sean: Yeah. Now, there are some positives to that. Somebody asked me a couple weeks ago, what do you suggest? Do you think it's better starting your own pharmacy or do you [00:23:42] think it's better buying one that's already up but doesn't do a lot of volume? It always depends, right?

It depends on the situation. But if there was opportunity in that area, [00:23:57] I think it's far better to start

off. With somebody else's pharmacy. 'cause you don't have to pay for a remodel or putting in fixtures, computers, equipment. And you already have a base of patients to [00:24:12] start from. You don't have to start from scratch and you start on day one.

If you're building out your entire pharmacy, it's gonna take you a minimum of six months to build out a pharmacy, get licensed, get third party contracts in [00:24:27] place before you can even start operating. So you're out of money to begin with and you can't even start to try and collect them for a minimum of six months. And, how do you find out if there's an opportunity in the area? Well, Talk to your wholesaler rep. Who are you gonna [00:24:42] use? They typically have information on the density of prescriptions in a certain area, and then you can look to see how much competition there is and that they can assist you in making that decision.

Is this gonna be a [00:24:57] potential for you to increase script volume or not?

[00:24:59] Mike Koelzer, Host: The thing that I always keep in mind, and I guess I'd give this advice to anybody who asked, but there's a lot of businesses that they start up and [00:25:12] they, the. Maybe forget that everybody is probably being served already. They might not like it, but they're not going without, in general, they're not [00:25:27] going without their prescriptions because they don't have a source.

They're probably getting 'em some way. They might be driving further, they might be doing mail order, they might be doing this or that, but it's not just good enough to come in and say,[00:25:42] here's our shingle. Look at us, because

there's probably not a hole there. It might not be the best fit, but there's probably not a hole.

[00:25:51] Sean: Yeah, but and again, it depends on the amount of options a patient [00:25:57] has in an area. Maybe there's only, maybe there's only two other pharmacies and they're super busy and they can't provide customer service. Some of these patients are probably dying to leave. And actually I'm just

a few miles away [00:26:12] from uh, the location that I was gonna open a pharmacy and worked with a pharmacy manager I was gonna hire and gave him the plans and he opened an independent next to two busy chains where there wasn't anybody else.

And he's just, he's [00:26:27] close to 3000 a week in just a few years, so he's killing it.

[00:26:32] Mike Koelzer, Host: Couple of friends of mine were both working at this one pharmacy in town. They didn't really like how the owner sold it. He had every right to do it, but maybe [00:26:42] sold it beneath them or didn't even offer it or something like that. So these guys moved next door in a building and within a day or two, they've got these three by five feet.

Portraits of both of 'em and they [00:26:57] plaster 'em right on the window with an arrow, like we're in here . 

Sean, there's one business that I think I would hate that would be the restaurant business because I hate, for example, an expired medicine.

 I get a year to sell something and they [00:27:12] get an hour or a day as you're driving around. What business do you say that'd be kind of a cool business, like a cool market to be in. [00:27:27] And also then which one do you drive around and say, thank God I'm not

part of that industry. That sounds like a terrible way to spend my day.

[00:27:38] Sean: So I'm gonna preface this. I don't do drugs, never [00:27:42] have, never will, but going by dispensaries. I'd wished I'd got into that. Because where I go, there are lines out the doors in a lot of these places. It's a cash business for the most

part. [00:27:57] And it's just from a business perspective,

It would be, in my opinion, very lucrative to be in that. As far as businesses that I would stay out of that I see I'm [00:28:12] trying to think. I think these little trinket shops 

The ones that don't have a strong business plan 

[00:28:21] Mike Koelzer, Host: My friend owns a tool and die shop with Hundreds of thousands of dollars of machines and things like that. And you think of the [00:28:27] pharmacy with all the overhead and the computers and all that kind of stuff, inventory, and He says, I never feel sorry though for these little shops that go in these cute town shopping districts , [00:28:42] because what did they do?

They went in there, they bought some clothes racks. have an iPad register thing and they may throw up a hand-painted sign. But I kinda look at those and I wonder that too. do they have a plan or was it a [00:28:57] hobby that one of the spouses was itching to do and the other spouse just to get 'em to shut up, said go and open up your damn business if you want to.

[00:29:06] Sean: You wonder if that's 

why they opened it up. 

I do anyway. 

[00:29:09] Mike Koelzer, Host: was an article today in oh, [00:29:12] daily mail or something like that, and it was talking about how the marijuana market is. They didn't use the word tanking, but they said, going down and I look at Michigan, there's some towns here because it's legal now. [00:29:27] State legal there's some streets now I go down it must be a countywide thing because there'll be like 10 of these shops, all different brands all the way down, like 10 of 'em.

 like you used to see with gas stations being

four on a corner or even pharmacies [00:29:42] back in the day. And you just wonder how they're gonna make it.

[00:29:45] Sean: Yeah. I guess I don't see 'em that consolidated in my

travels. But maybe they're getting that consolidated because there's so much money in it. I don't know. 

i don't know anybody who owns one [00:29:57] Sean, we gotta get into that book of yours. First of all give us a reason for that. Is it marketing so they can say, here's the author, or is it something you always wanted to do? Is it [00:30:12] for us

[00:30:12] Mike Koelzer, Host: Thick skulled pharmacists that aren't learning enough how to operate this buy, sell

thing?

[00:30:19] Sean: I think the number one thing is education, just educating pharmacy owners. So when they are getting [00:30:27] close to retirement or making the decision to sell. They're better informed on what things they should consider and how they go about the process. 

Part of it's marketing, obviously the services that we have [00:30:42] helping owners through this process.

but it really identifies the different steps you have to go through, how you go through those, the timeframe you need to go through. And it really talks about how difficult the [00:30:57] process can be. 'cause it can be crazy difficult. You could run into an obstacle 

that obviously you have no. You can't see it, right? You got blinders on, you can't see it ahead. You've never sold a [00:31:12] pharmacy before, so you've never planned to do that. But how do you react to it? A lot of these owners it's a challenge for them to react to it if they don't have somebody knowledgeable, use your resources, if you've got an accountant, make sure that your books your [00:31:27] profit loss statements are cleaned up and some of the unnecessary expenses are taken out in advance.

Maybe talk to an attorney, looking at different contracts. If you're not comfortable with the language of a contract, do not sign it until you are comfortable with [00:31:42] it. 

[00:31:42] Sean: There's other professionals out there that you can talk to, to assist. Just get some help, because the majority of owners, when you sell a pharmacy, it's the only time you'll ever sell a pharmacy. 

So why would [00:31:57] you? Why would you gamble everything that you've done over

the last, 10, 20, 30, 40, 50 years of pharmacy and just think that you're gonna be able to sell it and optimize your [00:32:12] purchase price. And it's not gonna be stressful because you're gonna figure it out. It's a challenge.

There's a reason that we're out there and helping owners because it's a difficult process.

[00:32:23] Mike Koelzer, Host: Signing leases and doing this stuff. These [00:32:27] are five year commitments and selling a pharmacy that's a lifetime commitment or longer than five years, and you don't get a bunch of do-overs. 

[00:32:37] Sean: No, I, and you may learn through the process, right? Like you do [00:32:42] anything in life. You learn from your mistakes, but you don't wanna make that mistake and think, oh, I should have done that when that was your only chance. 

[00:32:50] Mike Koelzer, Host: out of the percent of pharmacies that sell, what percent do you [00:32:57] think this is people on their own versus using outside services ? It's a tricky question because maybe everybody uses their accountant or a, or attorney or things like that, but let's say

services of uh, [00:33:12] consultant.

What percent do you think in the market do that or not?

[00:33:16] Sean: If I were to take a guess, I would say that 60 to 70% use a consultant of some [00:33:27] sort to help them. And there's maybe, 25, 30%, 35% that 

don't. But I don't know because I you don't know everybody who doesn't use a consultant to help them through the 

process.

[00:33:41] Mike Koelzer, Host: [00:33:42] After years and years, this was with an accountant, we finally went to a more of a pharmacy focused accounting service because, I was trying to teach our accountant about pharmacy [00:33:57] accounting, and that's like quantum theory. It's like you get things like that. Aren't supposed to be like that.

And they can't hardly believe that it's happening until you show 'em. And [00:34:12] it's nice now , instead of me explaining to somebody, it's nice to have an accountant with whatever number of pharmacies where they can tell me what the average pharmacist is doing and so on. And I imagine there's some people that might get an attorney or [00:34:27] something like that.

But unless you see it all the time,

 would be almost impossible to pick up on all the nuances of

it.

[00:34:35] Sean: And even step back as step, you've gotta first find the buyers too, to be able to. To sell. And [00:34:42] when you own a pharmacy, you don't want everybody 

to know your pharmacies for sale, because if you do, you may start losing your doctors, you might start losing your patients.

Worst of all, you might start losing your employees. [00:34:57] So how do you find it? You need to find a third party. An in

between that can confidentially bring in some qualified buyers to look at the pharmacy so that other people don't 

find out, 

[00:35:09] Mike Koelzer, Host: Last time we talked, I think [00:35:12] somebody 

Put it in the Daily Herald Or, something like, that, that they were selling or, and then the and the guy pulled out

[00:35:18] Sean: Yeah. Or it's on Facebook, it's Hey, does anybody know of a broker? sell my pharmacy. It doesn't. 

[00:35:25] Mike Koelzer, Host: exactly. [00:35:27] Sean. Have you come across times where somebody's going to sell and it makes sense to do something else with their building and things like that? The pharmacy's not needed because you've got chains, whatever that [00:35:42] are servicing people, not as well, they're servicing them.

Do you ever have someone

That, the value of their building and the value of this and that is higher than even being a pharmacy?

[00:35:53] Sean: Yeah, a

absolutely. And back to the dispensary [00:35:57] thing, we had an

owner,

In the Midwest that recently sold their prescription business because they had. If they were in the process of

starting a dispensary and they brought that in. We've had people that have removed [00:36:12] the pharmacy business. Actually this is more common out there.

You, you get rid of the pharmacy business and you focus on your D M E business. 'cause you've got margins of 40, 50% in that. As long as you've got enough volume to pay for 

the rent and the employees[00:36:27] it makes sense. And even maybe splitting off part of the pharmacy if you've got a hybrid, like a retail and compounding pharmacy.

Sell the retail and just focus on compounding. That's a really big trend right now [00:36:42] that owners are getting out of the retail and either converting to L T C where you get better margins, no d i r fees or compounding. We see a lot of that right now. And compounding is [00:36:57] obviously, especially the cash compounds,

There can be some great money made there and there's a lot of capital investment companies, private equity, that are looking to buy that up.

We've got a lot of contacts where they're saying, find us these pharmacies, we 

[00:37:12] wanna buy it.

[00:37:12] Mike Koelzer, Host: I'm dumbing this down for myself. Is there ever a time when you see a pharmacy being split where it physically is split? Like they build some walls to make the pharmacy, just the

[00:37:27] pharmacy, and then they leave this open and sell it to someone and so on?

Have you ever seen someone 

 With 5,000 square feet and then they sold something and now you've got 1,530 500, something like that?

[00:37:38] Sean: We'll see that in, in higher rent [00:37:42] areas. There's a pharmacy in Southern California. Their rent's like $20,000. So they made a deal with their landlord to come in and out, a wall in the middle that's basically gonna cut their rent, not quite in half, but it's gonna,[00:37:57] 

 Cut it down to where it's more manageable 

and then the landlord's just gonna rent it to somebody else.

We see a lot of people that, go and get a different pharmacy license for L T C, so they've got one for retail, one for L T 

C, [00:38:12] and then they get better reimbursements by having a space dedicated to the L T C type of 

prescription. 

[00:38:22] Mike Koelzer, Host: I forget who it was. It wasn't a guest. It was somebody who was actually in my pharmacy. [00:38:27] And I asked them what they would do in my situation. 'cause I own our building and it's kind of a cool building. It's like a peninsula that we have windows on, on three sides of our building because we have three streets that are around our [00:38:42] pharmacy.

Let's say I've got, I don't know, five years left there, they say, why don't you sell the building and get that out of it and then have a lease with this person that owns it. And I'm like, the last thing I [00:38:57] want to do is deal with another layer when it's my own place.

There's enough negative things that come with a business, not wanting to bring another layer into

that.

It just didn't seem worth [00:39:12] it to me unless there's some great reason to do it.

[00:39:15] Sean: There might be. There's some real estate companies out there. They'll, obviously, bring a premium to a piece of property if there's a steady stream of rent coming into it. [00:39:27] And real estate investors love pharmacies because they're so durable, they're longer acting. So it's possible that you could get more for your building, selling it, and renting back from them.

And [00:39:42] then when you go to sell your business, then whoever buys it is gonna be renting from this real estate company. And they might be able to do a lease option to purchase at some other point, but you could probably increase the amount of money [00:39:57] you get for the building 

if you sell it to somebody like that before you sell it. 

[00:40:00] Mike Koelzer, Host: give it a runway and get the money flowing in. And they might say it's a decent enough deal now, and in five years we'll worry about it more,

but at least we've got kind of

our [00:40:12] traction going a little bit

there.

[00:40:14] Sean: Yep. 

[00:40:15] Mike Koelzer, Host: Sean, now that you've put your thoughts together in the book what are the points that you think are the most important

points to get across in what [00:40:27] you've written and what you're gonna bring out in the book?

[00:40:30] Sean: I guess it starts from the very beginning. The very beginning is, when do you decide to sell or when do you start preparing to 

sell? 

And it's my opinion that you should [00:40:42] know what your pharmacy's worth, before you even decide it's time to sell. So what comes first, the chicken or the egg, right?

Are you prepared to sell your pharmacy first? Do you get a value first? I think you need to get at least a ballpark idea [00:40:57] or a general idea of how to value a pharmacy based on your positioning or your profitability. But once you know that, then I. You gotta start cleaning up your books. You need a clean profit [00:41:12] loss statement.

In other words, you need to take out and remove any non-critical businesses that aren't directly related to the business so that we don't have to do that when it comes time to sell. Because the more [00:41:27] adjustments you make on a profit and loss statement, when it comes time to normalize the net profit the more challenging a buyer might be or the less confident they might be on the financials.

Also, if you're putting any [00:41:42] other income in there that's not related to the business, you need to keep that out as well. Such as if you own other rental properties that you're making money on, separate everything. This should be for your pharmacy only, and that [00:41:57] takes a couple years, that takes a couple years to.

To really get that clean. So, your p and ls and your tax returns match. Because if there's a variance in the two, any buyer's gonna be cautious on why is [00:42:12] your p and l say this? And why does your tax return say that? So just make sure your cleaning up your finances in advance to make a buyer more confident in the business that they're buying. 

[00:42:23] Mike Koelzer, Host: When you say two years, it probably doesn't [00:42:27] physically take that much time, but one of the things that comes to my mind is when you're buying

Or when you're selling, maybe someone's gonna ask to go back a year or two just to make sure you 

haven't made a bunch 

of changes in the last [00:42:42] month to make it look good.

Is that one of the reasons

[00:42:45] Sean: It 

takes time to have those adjustments show up in your p and l, so if, for instance, at the

end of 2023, you gotta start working in January, February [00:42:57] for the end of 2023. The other reason is the banks that are financing these buyers are typically gonna want three years of financials.

They're gonna want three years of p and ls, , your payroll summaries. The other thing you gotta look at [00:43:12] is store conditions. It takes time to clean up your store, you want, you wanna put your best foot forward so you want somebody to walk into your pharmacy and be impressed and not see up on the fascia of the roof or [00:43:27] dirt or broken windows or lights, burn out. Whatever it is, you need time to clean that up. But most importantly, from a financial perspective, to get the best that you can

on the value when you sell it, you need to [00:43:42] look at the

expenses. Try to reduce those in advance. Your cost of goods sold is your biggest thing. Your purchasing. Are you at the national average of what the gross margin percentages are? Are you below that? If so, you may [00:43:57] wanna look for a new wholesaler or find out why you're lower. Obviously, if it's your specialty, it's gonna be lower.

But if you're in traditional retail, you wanna find out why you're lower than the national average. Labor and inventory are your next [00:44:12] biggest, uh, expenses. Are you staffing too many people? Has your business dropped? Have you not cut the labor? Are your employees making

you know more hourly than they should be because they've been with you for a long [00:44:27] time?

Yeah. Are you still giving health benefits? It's really tough with the margins today to continue to pay for health insurance, to continue to for profit sharing and other [00:44:42] benefits that we've been afforded to offer to employees in the past. with the increased scrutiny on the, the margin, it's, it's tough to do. 

[00:44:51] Mike Koelzer, Host: I think an owner, a lot of times they're gonna be with the [00:44:57] store or not be with the store, not based on 10,000 bucks this way or that way. It's either in their blood and they want it or they want to get out. But a buyer coming in, that [00:45:12] stuff matters. thousand bucks here or there, or 10,000 here or there.

They don't have that

long term

decision from the heart and all that stuff. They're looking

at those 

numbers and to clean those up, it might [00:45:27] make you look better than

the next pharmacy.

[00:45:28] Sean: if you cut payroll by, let's say 20,000, which may not be significant, but. Keep in mind that the multiple value in a pharmacy is three [00:45:42] times the value of the net. So if you put 20,000 back to your profitability, it's worth three times more value to a buyer.

So that adds 60,000 worth of value. So you've gotta [00:45:57] look at, in that terms, anything you can save on the expenses is gonna be worth three times as much when somebody comes to purchase your pharmacy, the average selling multiple is typically a three 

time multiple 

of your [00:46:12] normalized or adjusted net profit. You know what your

true net profit Is after you've adjusted all your expenses. Anything you can take out of expenses and add to the profit is gonna 

Increase the value by three times of what that [00:46:27] expense is.

[00:46:28] Mike Koelzer, Host: I talked about potential earlier, and one thing I was thinking of is I wonder if there's anything that you should do or should not do [00:46:42] to your business if you're thinking of selling, and here's my point. You mentioned medical equipment. Let's say you have medical equipment, and let's say the buyer's interested in medical equipment. If you have it, you might attract a buyer who [00:46:57] says, okay they've got medical equipment, that's good. If you don't have it, maybe that buyer will say It's good they don't have it, because we're gonna come in the area and we're eager to put in medical [00:47:12] equipment something that this

pharmacy never did, and we're

gonna kill it, with it 

[00:47:16] Sean: It's hard to know what type of independent buyer you're gonna get interested in your store, right? It's hard for you to predict what interest they're gonna have. What is [00:47:27] helpful to know is when, when you get a valuation on your pharmacy and a lot of people will give you the valuation complimentary just to build a relationship with you. So once you look at that,

There should be an [00:47:42] indication of what the value to your pharmacy is gonna be if you sell to an independent versus if you were to sell just the files and inventory to a chain. And you might get an indication of who, [00:47:57] what type of buyer is gonna be able to give you the highest purchase price for it.

 So let's say you're cashflow negative or cash flow neutral. You don't have, you don't have a real profitable pharmacy, but there's a chain sitting [00:48:12] next door that's probably gonna be the logical

person to buy it. So there are things that you need to consider to prepare your store. Knowing that they're probably gonna be the most likely [00:48:27] purchaser. In other words, you don't wanna have a lot of controls. I would say nothing over 15% of your total prescriptions should be controlled. It should be under 15%. You don't wanna have a lot of [00:48:42] cash prescriptions because they don't think they're gonna retain cash prescriptions. So if you're bypassing copays and just, changing it in the system to what the copay would be and doing it as cash or cash discount, that's [00:48:57] gonna hurt you when you come dime to sell because they're going to, they're gonna discount that prescription, special packaging.

If you do blister packs, multi-dose packs, 

they're probably not gonna continue that and they're gonna discount those [00:49:12] prescriptions There was a time where the chains were doing delivery, but now they're pulling back again because it's so expensive and time consuming. They're discounting stores

that have a high percentage of delivery as well. So these is the, some [00:49:27] of the things you wanna consider in advance if a chain is a high probability to sell to, 

[00:49:35] Mike Koelzer, Host: the one on the controlled one? They don't want to because of all the problems, 

[00:49:39] Sean: the wholesaler. They have the same thresholds [00:49:42] that

an independent does. Bringing in these additional files, it might 

take them over their threshold and all of a sudden they can't service the controls and those patients leave and they take their regular scripts with them as well.

[00:49:55] Mike Koelzer, Host: I gotcha. And they wanna [00:49:57] take care of their patients instead of bringing this new batch in and all of 

a sudden they can't serve 

anybody.

[00:50:02] Sean: Right, exactly.

There's a lot of consideration to think about before 

selling. Right? 

[00:50:07] Mike Koelzer, Host: Sean, thanks for joining us again. We're [00:50:12] 18 months out from when we talked last time. A lot has changed, a lot has stayed the same. And it's always good to get our knowledge on that from somebody who's living it day in and day [00:50:27] out in the field and doing a lot of 

it.

So 

Thanks for joining us again and we'll have to get another update from you in another year or two. 

[00:50:34] Sean: Yeah. Yeah. Thank you for having me on. It's crazy that it went this quickly. a lot to talk about. We're both very passionate about [00:50:42] what we do, so I guess it's easy to just talk. and talk. But I appreciate you having me on the show and, love, having discussions with you. 

[00:50:50] Mike Koelzer, Host: Alright,

Sean, we'll keep in touch, we'll put some links

into 

the show notes and I look forward to talking again soon. [00:50:57]