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34 BUSINESS THROUGH INNOVATION FINANCE TDO GREENFIELD PHARMACIES MAKE SENSE? he demand from pharmacists requirements to ensure the premises reportedly more than 50 per cent. to own a pharmacy is still are satisfactory. It might take several years or more strong. A prospective Based on your initial reconnaissance, before the business has sufficient pharmacy buyer needs to prepare a detailed monthly forecast customer base and sales revenue to compete with other buyers, then of all potential business expenses and be able to cover all costs and reach compete to identify something within their price range. As market selling prices are still relatively stable, this might preclude a first timer from being able to afford to buy a pharmacy. Bank lending policies have become stricter compared with a few years ago, so buyers generally need a significant deposit before committing to buy. As some potential owners are now effectively locked out of the market due to price, they may consider entering into partnership in an existing business, or establishing a new pharmacy as a start-up (known as a greenfield site). Where to start? Locate a site where there’s potential demand from customers. Look for a location with a regular flow of foot traffic, a source of prescribing doctors, and a demographic profile that could provide a realistic customer base. Study local demographics by analysing the composition of age groups, family/household numbers, cultural influences and average yearly income. Consider your proposed point of difference to attract customers – one that encourages change in their existing buying behaviour. Why are you different? Is it just convenience of the location, or hopefully something more? Investigate the relevant Pharmacy Council regulations applicable to your state or territory and consider whether you could successfully apply for a new approval number based on your unique situation. Some greenfield operations begin life as non-PBS pharmacies, then if/when circumstances change, approval may be granted later. Research local council zoning realistic sales targets. It’s advisable to consult an accountant that specialises in pharmacy, to do this justice. This will demonstrate the potential financial viability and relevant time frames (for example, when the business should start to break even). Why do it? Greenfield pharmacies provide a relatively low-cost entry to ownership, as you aren’t paying an existing owner for goodwill. But cashflow is critical. You need to fund opening inventory, fit-out and computers, a deposit bond for the landlord, and legal and accounting establishment expenses. You also require a marketing budget to promote the new pharmacy. Because the business has no track record, there’s no guarantee of likely sales revenue, so the owner will also need a buffer of working capital to help meet regular daily costs such as rent, wages, insurance, electricity, etc. Hopefully in time, the business generates a regular income for the owner. Once it derives profit of more than a typical employee’s salary, potentially you’ve created an element of goodwill. This becomes a notional asset for you, which could be recognised by the bank and potentially used as security to fund further finance applications later. Why you wouldn’t Without a history of sales revenue or profit, the business’s risk profile is significantly higher than that of an existing pharmacy. The probability of a small business ceasing operations in the first three years of trading is break-even. It may never reach this, which means that as an owner, you might be working harder than ever yet earning less than the minimum award as an employed pharmacist. This can be challenging, both financially and emotionally. When you’re part of a start-up business, you might need to rely heavily on family and friends for financial and emotional support. Working capital required can be significantly more than your original forecast. Maybe customers aren’t attracted to your business. How will your nearest competitors react? Can you hire and retain good staff? Do you have sufficient stock on hand to meet customer needs? Do you need to invest in more training? This all costs money. You should recognise that it’s more difficult to organise bank finance for a greenfield site. Lack of capital is probably the biggest cause of small business failure. I’ve observed a wide range of greenfield businesses over the years, with a variety of outcomes. No doubt you can create a worthwhile greenfield business in the right circumstances. But ensure you seek independent expert advice before making any commitments. By Neil Featherstone. Director Pinn Deavin Neil Featherstone is a director of Pinn Deavin, a leading accounting, management consulting and investment firm. Neil has been advising pharmacists since 1984. Inquiries: neil@pinndeavin.com.au or 02 8525 3700. Accountants specialising in Pharmacy www.pinndeavin.com.au Neil Featherstone (02)85253700 Neil Featherstone 30x190.indd 1 RETAIL PHARMACY • MAY 2021 19/1/05 8:38:24 AM 2019-1-11_PinnDeavin_StripAd_Proof.indd 1 11/1/19 1:26 pm