How to Find Hidden Specialty Pharmacy Deals – Broker Secrets Explained

0:00Hello, ladies and gentlemen, boys and girls, and welcome back to Acquisitions Anonymous. This is the internet's number one podcast on buying, selling, and operating small businesses. I am Bill D 'Alessandro. I'm one of your hosts. And I'm here today with Mil Snell and Heather Anderson. And we have a really cool business today. It is a specialty pharmacy in Beverly Hills, California. It's got$1.5 million of EBITDA. We think it has about double the typical EBITDA margins of your standard specialty pharmacy. and the seller has cancer, sadly, and is a forced sale. So a very interesting situation, especially if you are into pharmacies in California.

0:39So without further ado, I hope you guys enjoy this episode of Acquisitions Anonymous. We'll start Acquisitions Anonymous. Hello, another episode of Acquisitions Anonymous. We don't have 100 % beard anymore. I'm thumbs downing on just the plus inventory. Hey, Michael here. This episode is brought to you by Tonnenson Accounting Services, the leading provider of quality of earnings reports for small and mid-sized business deals. Every year, their team reviews over$500 million in transactions, and the reports are trusted by buyers, bankers, sellers, and brokers nationwide. What sets Toninson Accounting Services apart is premium quality work at an unmatched price, a full quality of earnings report for just$6 ,000.

1:19You'll get more depth and insight than firms who charge twice as much, which is why so many dealmakers turn to Toninson Accounting Services when accuracy and speed matter the most. There's a link to tonnensonaccountingservices.com in the show notes or reach out to Josh Tonnenson on LinkedIn for a free consultation where he'll walk you through the process step-by-step and answer any questions that you have. Tell them that Acquisitions Anonymous sent you. All right. Acquisitions Anonymous afternoon edition, aka Heather's midday, but Mills and I are 5 p.m. here at the end of the day. I should have made a cup of coffee at this point.

1:51That's right. Yeah, we're coffee on one end and Heather's coffee on Fridays when we record 7 a.m. her time. Right. Well, Mills was just telling us that he nearly lost his middle finger in an industrial accident at an oyster roast. A lady at the grocery store was like, you must have used your finger one too many times. So Mills, if you're on video, I don't know if it still is, but Mills has a permanent middle finger. His middle finger on his left hand is permanently upturned while he's. So don't take it personally. So don't take it personally. So we do have a deal today, which Heather brought us, and it is in the great state of California.

2:29Of course, the great state. Where all great deals go. And I'm sure we don't all agree on that part, the great state. I was going to say where all great deals go to die, but I was going to try me nice. That too, that too. A lot of big businesses built in California, including Heather's Viso Capital. If you need an SBA loan, call her. That's right. So specialty medical pharmacy in prime Southern California location, Beverly Hills, California. You all know where that is. Asking price$7.1 million. Cash flow SDE$1 ,490. Gross revenue$6 ,209. EBITDA is$1 ,490. I guess they say EBITDA and SDE is the same here.

3:11Rent is$9 ,167 a month and it was established in 1980. So this is only 4.75 times EBITDA. Yep, there you go. Only listing of its kind in the state of California. Revenue 2025 expected is, so that's the expected for 25, 6 ,209 EBITDA expected 1 ,490, 4.7 multiple. The broker's actually telling us that. Specialty pharmacy comps from$1 to$10 million in sales are usually 5.5 to 15.5 times earnings. That's what the broker's saying. I don't know. That's a heck of a range, 5.5 to 15.5 times. I don't know where he got that, but that is what he's telling us. The current U.S. specialty pharmacy market is$129 billion, expected to increase 700 % to$1 trillion in five years.

4:06Current estimate only 25, this person does not want to use a lot of extra words here. So current estimate only 2 ,500 specialty pharmacy business units in America. Ask yourself, who is going to fill the 700 % increase in demand? That part made me laugh. Jonathan, you nailed it. Prime Southern California location within reach of 50 plus hospitals, rheumatology, immunization, and pain management. total value-added physician services with patient insurance coupons and same-day high-dollar specialty prescriptions, immunization, all formats of compounds included children. Again, I'm not sure how this was written.

4:50Seller wishes to stay as consultant to grow the specialty business and re-enter cancer chemo. That's, let's see,$100 ,000 of inventory is included in the asking price. The real estate is leased. Furniture, fixtures, and equipment is only$45 ,000. That's included. And the reason for selling, oh, that explains the prior comment. The reason for selling is acute health issues and retirement. So when they say re-enter cancer, chemo, that's what that meant. It was not re-enter that business line. That's the way I read it, too. That's what I thought, too. Right. But then we see that it sounds like the seller has a imminent health problem, and that is the reason that this business is being listed.

5:34So what do you guys think? The first thing I went to is I clicked on Jonathan's listings. The business broker. Yeah, the business broker. And I don't like it as a signal when this is the biggest deal he has by far. and I don't know if you guys have ever run into this before but like I want the business broker to be like right in their sweet spot it's right up there at the top bill under his picture it says for sale but he's got this one at 7.1 he has a truck stop for 2 million a LA fashion brand for a million 95 and then a bunch of like sub 500 000 listings so I think you know the listing is telling on itself a little bit also in terms of the way he's presenting it and some of the language and the really, really wide range and those kinds of things.

6:21But I always just am curious, like what else does this person sell and what have they sold? And this doesn't necessarily help the case, I don't think. I agree with that assessment. Like you want a broker who's right in the middle of their strike zone. That being said, we may be catching this guy on a bad day because he's got 45 years experience, a 25-year Wall Street veteran and senior vice president of several Wall Street firms, including investment banking, having successfully purchased, built, prepared for sale, and sold five companies with a capitalization totaling over$100 million. You're right.

6:49Yes. So that helps. You know, I like the sound of that. You just went up two notches. So that's positive. So this deal is founded in 1980. It's got$1.5 million of EBITDA, and the founder is selling for acute health reasons. At the high level, already I'm interested, right? A business has been around for a long time. it's big it's big enough not like super chunky but it's 1.5 million and a forced seller and it's when i say forced seller like it's not so much that you're trying to get it you know rip the guy off it's more like you you're less worried that he knows something you don't and is trying to sell you a bag of goods or a business that's its best days are behind it right so just right off the top like i kind of like the setup what is a specialty pharmacy versus a pharmacy i think gets compounding pharmacy.

7:42That's the word that I'm more familiar with. And that's what I usually think of when I hear specialty. It usually means that they are preparing, you know, custom compounds rather than buying the, you know, pills and vials and whatever they come like from the manufacturers. They are actually putting together a custom, you know, I don't know, the formulations, you know, that are specialized, right? That the masses don't necessarily need that particular setup, but you have to go to a compounding pharmacy to get something very specific. And so if you look around, even like in my town, there's a couple of them in town, they call them, they say compounding pharmacy, and they'll usually have, you know, special net, like they say, they talk about it here, a network with certain physicians where they're sort of the go-to for certain compounds, you know, to be put together.

8:38And it's, you know, it's, I believe it's a lot more skilled pharmacists that's required for something like this, because they are actually formulating the prescription that's going out, you know, they're, and I'm sure they're doing some quality testing and things like that. And I think one of the problems or the challenges with the pharmacy industry, I believe there is a shortage, like a lot of things, there's a shortage of pharmacists. And that's what I've, you know, come to know in looking at a few pharmacy deals that there is kind of a known shortage of pharmacists. So this is kind of an interesting challenge here.

9:14If you're not a pharmacist and you want to own something like this, I think that that's not the easiest thing in the world to do, to even get financing, to maybe get licensed correctly. And that may be why the multiple can be a little bit lower here, because you really need a specific background for this in many cases. We've talked about this in other industries about consolidation, but if there is any industry that has just run amok with consolidation, it is pharmacies. And the 800-pound gorillas are Walgreens and CVS, and they have consolidated the hell out of this. Yeah. So I've been doing some Googling and chat GPTing and learn a little bit about this industry.

9:57So the key things for this industry are where do your prescriptions come from, your referral sources, and are those kind of contractual and durable and, you know, the customers are still going to come in. And then the other question is who is paying and how much? Like what is the content of the prescriptions? Like is this kind of low margin? The compounding stuff is apparently not great margin. The high margin stuff is like the specialty drugs, the pain management, the recurring, the biologics, like all kind of like the more cutting edge stuff, which apparently it is pretty hard to get payer access to.

10:34And a lot of these smaller pharmacies, if they get a script for one of these biologics, they often have to refer it out because the insurance, they're not an approved vendor for the insurance companies or for whoever the payer is. So like apparently the, uh, the pharmacy benefit networks are very, uh, they're strict on like who can, who they're going to reimburse for certain drugs. So if, if this business is approved to dispense these high margin drugs and has durable access to a source of prescriptions and patients, a hospital or something that's contractual, this becomes a very good business.

11:12If it is a, uh, if they don't have access to the high margin stuff, it's primarily like compounding and durable medical equipment, you know, like lower margin, and maybe it doesn't have, you know, a contractual relationship with a hospital, then it's a much less good business. I also learned that typical margins in this industry are 10 to 15%. This business is showing almost 25 % margin, which is potentially a clue that it is that they are doing some of the high margin business that is hard to get for an independent pharmacy. Yeah. Yeah. It is like that. That's what I, that's what kind of caught my eye is I think the margin sounds pretty good.

11:55Now he's only giving us the expected 25 numbers. There's no historical, what did 24 look like? We don't know. So it would be nice to know, is it just a high point that they're selling at or what did the prior year look like? Yeah. I mean, yes, I generally worry about that if the guy didn't have cancer. Like he probably just selling on whatever he's got right now, you know, which is again, horrible for him. But as a business buyer, it gives you a little bit more confidence that you're not top-ticking it. And I think that these have remained mom and pop more than the kind of just regular run-of-the-mill pharmacies.

12:36I have a friend who sold a pretty large pharmacy business to, I think it was Caremark when he sold and they, the niches in this industry are crazy. He ended up having like a huge, I think it was like diabetes and insulin business. And it was so lucrative that they shut down like a dozen retail pharmacies because they cannibalize the CVS business. They were like, look, we just want your, you know, your insulin because it's so profitable and we'll pay you off of the EBITDA that you had, which was incredibly high. I mean, It was over a$200 million transaction. And then we're going to shut down all your other pharmacies just to fold all those customers into our core business.

13:17I think even if these have remained independent while consolidation is going on, the hardest thing is, Heather, what you said, is the competition around pharmacists and the wages that Walgreens and CVS are willing to pay. I know I've heard from a friend of mine who's a pharmacist that they will pay more than anybody else. So it's really hard for the mom and pop to compete. And this may even be a more competitive subset to get into something so specific. Yeah, I would want to know if the seller is a pharmacist and if they have been in the business working. I tend to think yes, because the illness is forcing the sale.

13:55So, you know, that means they're probably working there, which means, you know, that SDE EBITDA difference does start to matter now is, you know, is the seller's salary in there or not? And what is it going to cost you to replace them? I did look once at a compounding pharmacy that was highly specialized, and it required a lot of skill to prepare the compound that they prepared. It was a very reoccurring revenue patient stream. It was a medication that was, if you had this illness, you needed it for life. And there was only a few places regionally where you could get this compound. But it does depend, you know, what does your patient base look like?

14:40How reoccurring is that? And then what is it really going to cost you to staff this properly? Because the risk in this kind of business is preparing the compounds wrong and, you know, the liability, right? So you can't cut corners on the skills that you need to run this business. And it's a highly regulated industry and a highly regulated labor pool. I think now the pharmacy programs are like, I think they're, we had a babysitter who, she ended up doing, I think, like six years of undergrad in order to come out with a pharmacy degree. I think it's like a PharmD is what they call it now. I may be wrong on that name, but it's, it's staggering.

15:25Yeah. Yeah. And it's not an easy job. It's, you know, so that's why I think there's a shortage. You know, even though it pays well, it's still a high pressure, high stress kind of job. And you're working essentially retail and retail hours. Yeah. Well, maybe, but this is not a retail pharmacy. Yeah. This is a specialty pharmacy. Like, they probably don't have walk-in. Or, I mean, maybe to pick up, but like, this isn't a CVS. I've had to get some like compounded stuff for my kids at different times. And it is, it is kind of like, you'll just go wherever you have to go. It's not like you go to the closest pharmacy like you would for your regular antibiotics or whatever.

16:04Right. Yeah. And this is specialty. I mean, this is like, you know, your rheumatology medicine or, you know, pain management or, you know, I think this is potentially interesting. So, but I mean, can you buy it as a non-pharmacist? I think that's the first question. That I don't know. I have no idea. And this is not like the type of thing where you're going to get certified as a pharmacist nights and weekends. It's like a real degree. Yeah. I think this is one of the tougher ones. You could maybe use an MSO, medical service organization type structure. But I think lenders would, then you might cut yourself off if you're not a pharmacist from the debt pool.

16:45A lot of lenders are going to have a hard time with that, even if you could make it legally work. So I think that is the number one challenge here. Can you do it if you're not a pharmacist? Can you do it if you're not a pharmacist? Or can you bring a pharmacist in as a partner? That's probably the way you do it if you're a business person and you want to do this deal. Yeah. And does the pharmacist need to be the majority or not? Every specialty has its own rules around that. And is that state by state? I'm pretty sure it is because I've looked into that in the past. I don't think it's a federal, like nationwide thing.

17:18I think every state is a little bit different. Exactly. It's state by state. So you're going to want a special attorney that's just going to help you with that part of the deal. Literally, that's a whole other legal fee on top of your regular attorney to work that part out for you and how it's all going to work. But if you're not a pharmacist, you probably need a pharmacist to be your partner. And yeah, maybe they have to be the majority partner. So if you're a pharmacist out there, here's your deal. Hey, everyone. It's Bill. And I want to tell you about maybe the most exciting sponsor we've had in a long time on the pod.

17:51It's called Capital Pad. And it is the thing that I wish existed when I started my journey of operating and investing in small businesses. So Capital Pad is a marketplace for acquisition entrepreneurs. That is people who want to buy a business and need capital to list their deals and solicit capital from other people who want to invest in acquisition deals. So if you want to back somebody buying a small business, CapitalPad is the place to do it. And if you want to buy a business and need capital, you can go on CapitalPad to be introduced to investors. So the really great thing too from the investor side is that CapitalPad takes care of all of the details that can get hairy with small business acquisitions.

18:36They handle standardized terms, standardized governance, standardized distributions, all up front in black and white. Basically, Capital Pad professionalizes investing in small businesses, and the returns can be really, really good. I'm so stoked they exist. It's founded by my friend Travis, who is a phenomenal entrepreneur in his own right. So if this sounds like something that's appealing to you, if you want to buy a small business and need capital, or if you want to invest in small businesses, go check out CapitalPad.com and tell them that Acquisitions anonymous sent you. So what's interesting is that remember, it says the seller wishes to stay on as a consultant to grow the business and reenter chemo.

19:17Could you buy the majority from the seller? But then what happens if he dies of cancer? Yeah, right. You have to have a backup plan. Or like, how does the regulation treat that? If you have a business, you know, like, kind of not your fault, your partner died who was a pharmacist. Yeah. Well, they give you some kind of holdover period of, you know, 12 months or something. But again, I mean, the second key question is, do you have to be a pharmacist in California to own a pharmacy? Two, how many pharmacists are on staff here? This is surely not a sole, you know, owner, operator. And like he's doing all this work.

19:53I would be flabbergasted. So how many pharmacists are there? And is there one that you could partner with and say, hey, I want you to be the continuation of this from a licensure standpoint? you know in the real estate market you have like brokers and then you have brokers in charge who actually is who everybody hangs their shingle to and they get paid right regardless of whether or not they work directly on that transaction i wonder if it's maybe a similar phenomenon here i mean that is maybe the way it works if you've got one or two long-time employees and go you guys want to become owners in this thing like and you work out a deal and they you know they earn it.

20:30Maybe they earn into equity or something, but they're the licensure and maybe you do it. Yeah. What do you guys think? So I think we've poked fun at this kind of thing before, but whenever people talk about the TAM, the total addressable market, that's totally irrelevant. Like it doesn't matter how big the TAM is. This is a single location specialty farm. Right. Right. I do like the fact that he's saying it's growing. And I will say, I really, really like how affluent this market is. I drove down Heather when I was in California back in October. I drove down Rodeo Drive. There's no shortage of discretionary income.

21:08And not that pain management is a discretionary expense, but this isn't in like Salina, Kansas. This is the center of affluence in the country in a lot of ways. And so I would think that you've got probably an even like a different subset specialty to the specialty pharmacy being in that market. Yeah. So your pay or risk might be a little bit less here because, yeah, some people have insurance, but some people are private pay. And you probably have a lot of patients who can can afford it no matter what. and it's not as big of an issue as it would be somewhere else. I do like the idea of partnering with the existing pharmacists, but what I was going to say is whenever I see someone try to put a deal together with the employees, a lot of those deals fall apart.

21:59Even though they make so much sense on paper, they fall apart because these people that are employees, they don't want to own a business a lot of times. It sounds good at first and they say yes, And then they get into it and they realize, you know, that there's responsibility and financial duties that they're not used to. And a lot of employees just they'll just back out. You know, they'll get kind of three quarters of the way through or halfway through the deal. And then they'll just say, no, I don't want to I don't want to sign these papers. I don't understand what they all mean. And they won't do it.

22:30Yeah, it can be hard. It gives you the ick, you would say. Yeah. whenever I hear certain people trying to put deals together certain ways I think oh I don't think that's going to end up working yeah I could see that I mean this there's a lot of very like binary hard yes hard no things that you would be able to find out I think fairly quickly and due diligence on this but you know if you're not a pharmacist and you want to buy this business and you have to be licensed as a pharmacist in California in order to own it like then that's what we're trying to solve for. But it may just be very quickly put in the too hard pile.

23:10I mean, I also think, so this is something else I want to bring up. You buy any business, you're going to have a quality of earnings report. You're going to bring in an outside expert who is a better accountant than you to look at the accounting of the business. If you're buying this business, I think you also are going to want an outside expert in the specialty pharmacy industry to come in and kind of issue you a report of some kind on, is this a good specialty pharmacy or a bad specialty pharmacy? Like how stable are the reimbursements for the categories that they're in? You know, help me audit their contracts.

23:45You know, you want somebody who's seen a bunch of specialty pharmacies to tell you, this is a good one, this is a bad one, because I think there's a huge range of good ones or bad ones in specialty pharmacy. And it's technical, what makes a good one or a bad one. And the only clue we have here that this might be a good one is we think they might have above industry average margins. And the fact has been around for a long time. Those are two both very strong signals. You have a good business as opposed to a bad business, but we don't really know why. But who's going to fill the 700 % increase in demand?

24:21Ask yourself that.

24:25yeah to use the i mean if you're a pharmacist in beverly hills this could be a slam dunk yeah yeah the problem is how many pharmacists are out there looking to buy a business i have one right now and i actually just wrote down a little note to tell him about he's he's got a different deal uh that he should be closing on soon but i'm gonna i'm gonna show him this one Smells like an add-on, Heather. Yep, exactly. Heather, I mean, is this financeable? Yeah, it is financeable. More so as an add-on, maybe? Yeah, as an add-on, it is very financeable. So if someone's already got the legal structure and the pharmacist structure figured out, or they are a pharmacist, this is very probably easily financeable because it is a good multiple.

25:10And it is probably a lot of reoccurring revenue in a space that is, you know, not recession, you know, sensitive. So, yeah, the very, very financeable. It's in a great location. But it just has to be the right buyer with the right structure, the legal ownership structure. Do you guys think that this actually sells for$7 million? Probably not. And this is the other thing I want to mention. the reason i now well i mean if it's a good business and one of the consolidators gets whiff of it heck yeah and they're gonna feel like they got a great deal at 4.75 times right if you if you're just you know a pharmacist or somebody part was a pharmacist you've got a seller here who needs chemotherapy you've got a little bit of a forced seller and it's got to be kind of a quick deal because time time is life for this guy um so your price is going to have to be part of your diligence a little bit.

26:07Right. So like, you're not going to have 120 days to like get really smart on this thing. So you're going to have to price that in and kind of cannonball in and hold your nose a little bit. And that hurts value. Yeah. Maybe a seller note that, you know, you know, one way or the other, the seller can get that additional value if the, if the earnings stay at this level for another year or two. But yeah, you're right. I think that's a good point. You've got to close quickly. Yeah, which hurts your price. Now, if you're an existing pharmacy and this is an add-on, you're going to get sharp on this business almost overnight because you're going to know it.