Understanding valuations of their pharmacy is essential in the decision-making process for pharmacy owners who are considering selling.
People who have purchased a residence are familiar with real estate appraisals. With a pharmacy business there are times when both the real estate and the business itself will need to be appraised. The pharmacy “business” appraisal does not include the real estate and is more commonly called a Pharmacy Business Valuation.
Pharmacy Business Valuations are conducted when there is a possible acquisition, financing is being pursued, or legal matters require a valuation. A Business Valuation places a reasonable market value on the drug store after consideration has been given to factors such as, but not limited to: assets, financial statements, tax returns, script reports, goodwill, licensing, competitive studies, deliveries, mail order, regulatory concerns, management’s team, inventories, and industry comparisons.
There are a number of companies that provide business valuations. However, unless they specialize in the pharmacy industry the valuation company will not have current pharmacy data on which to base their conclusions. The pharmacy industry is changing. Pharmacy values are on the decline due to current economic and market conditions, fewer pharmacists are willing to move to an ownership position, cuts in reimbursements and dispensing fees, many of the regional pharmacy chains who were buyers – have sold to the larger chains, and even large chains have merged.
In order to calculate a realistic value for a specific pharmacy it will require current industry data along with knowledge of the potential buyers for that specific location. When all of the factors that are affecting the pharmacy industry are not considered – the conclusions will result in a more ambiguous valuation and could lead the pharmacy owner to make a decision not based on the best information. When a valuation company specializes in a specific industry, that company will be able to offer a more precise and credible valuation.
Many generic valuation companies will calculate a value for a pharmacy based on simple accounting formulas because they do not have the industry data that should be used. “Multipliers” are one simple method that is often used. The multiplier method is when someone takes the net profit, EBITDA, or some other figure and then multiplies that number by 2, 3, 4 times, or whatever number the person doing the calculation decides.
Understanding a Few Points About Simple Method Valuations
- Financial statements are typically prepared to justify the lowest possible taxes. Therefore, the data going into those financial statements must be analyzed.
- Stated profits are not usually the actual cash flow of the company.
- Due to tax reasons and depreciation, company assets probably have a different value than what is stated on the Balance Sheet.
- Multiples and other simple valuation methods can provide the same value for businesses that are in different competitive markets, population density, etc. Example, by using multiples a pharmacy in Manhattan with the same sales as pharmacy in a one-horse town could be valued equally. However, there may not be anybody willing to buy the store in the one-horse town, but there could be a bidding war for the Manhattan location. Although their sales are the same, obviously they have different values.
What it Means
The value of anything is only how much somebody else will pay for it. Any industry with declining net profits and fewer buyers will see values declining. This is what is happening in the pharmacy industry. Lower net profits means it is harder for the business to service debt. This means it is harder to obtain a business loan. Lower profits also mean it is more difficult for an investor to achieve their required Return on Investment (ROI). This results in lower pharmacy business valuations.
Today’s Value vs Yesteryear
Understanding valuations and where the current market is pushing the valuation of pharmacies is important for pharmacy owners. At www.PharmacyValuations.com, we often receive a valuation requests from a pharmacy owner who had a friend that sold a pharmacy a number of years ago and thinks his current store value should reflect equally. This is just not the case. Your friend’s historical value is not relevant in today’s market.
The above points should assist in understanding valuations and how the calculation of a pharmacy’s worth, based on simple calculation methods, may not reflect the true market value of the drug store.
As a pharmacy owner, you can receive a free pharmacy business valuation to understand the current worth of your pharmacy. However, when you have PharmacyValuations.com calculate a current market value for your pharmacy … you may be displeased with our conclusions – based on realistic aspects of the pharmacy industry. You will get an honest and straight forward opinion with no blue sky.