What’s Your Pharmacy Worth?
Understand how pharmacies are valued and then take four steps to improve your pharmacy’s value.
Even if you don’t anticipate selling anytime soon, wouldn’t it be nice to know — and then to increase — your pharmacy’s value?
How pharmacies are valued
Ultimately, a pharmacy’s true worth is determined in the marketplace by what a buyer is willing to pay for it. But there are several common valuation methods that provide a general approximation of value. Some of the most commonly used models focus on “hard financial” information, such as revenue, profits and the value of assets.
Common “Hard Financial” Valuation Methods
Net Income = (Multiplier of 1.5) x (Net Income)
Percentage Volume Plus Inventory = (15% of Total Sales $) + ($ Inventory)
Prescriptions Plus Inventory = (Average $ / script) x (# Yearly Scripts) + (Inventory)
Net Profit = (Multiplier of 5) x (Adjusted EBITDA)
Itemization = (Assets) – (Liabilities) + (Goodwill)
Direct Assessment = (Tangible Assets) + (Intangible Assets)
Other financial factors that can affect a pharmacy’s value include:
- Add backs. Some owners may have incurred expenses, such as a significant owner’s salary, personal expenses, excess labor, or contributions to a SEP or another type of retirement plan, that a new owner wouldn’t necessarily incur. These expenses can be added back into a pharmacy’s profits, which will improve the value.
- Assets and liabilities. Assets such as inventory and real estate can affect a pharmacy’s value, as can liabilities including debt, leases, and other sorts of contracts and commitments. In estimating your pharmacy’s value, all of the assets and liabilities need to be taken into consideration.
Typically, potential buyers will want to see how a pharmacy has performed over time by looking at financial information over the past three years.
In addition to hard financial considerations, the value of a pharmacy is also affected by “softer” factors, which can make estimating a pharmacy’s value as much an art as a science. Softer factors can include a pharmacy’s location, its physical appearance, the pharmacy’s standing in the community, the age and composition of a pharmacy’s customer base, and the strength of competition in the local area. All of these factors, which can be hard to quantify, can affect a pharmacy’s valuation.
Four steps to increasing the value of your pharmacy
Once you understand how pharmacies are valued, here are four specific steps that can positively affect your pharmacy’s value.
- Improve the curb appeal. Even small efforts, like new signage, fixtures and paint, can refresh a store’s appearance and can positively affect how a store is perceived. (Just as homeowners make small cosmetic improvements to enhance the perceived value of their home, pharmacy owners can do the same.)
- Update the inventory. Old inventory on shelves or in storage can be a red flag. So, remove all obsolete inventory and make sure your shelves are stocked with new, contemporary products.
- Make minor capital investments. To increase your store’s value, it may be appropriate to make investments to upgrade your technology and/or workflow.
- Grow your sales and prescriptions. At times, pharmacy owners have grown comfortable with their current level of business. To boost your pharmacy’s value, look for simple yet creative and innovative ways to boost your prescriptions and sales, such as new types of marketing activities. Increases in volume will translate to increases in value. Sometimes after having not actively focused on growth for some period, there will be low-hanging fruit.
Most important, the key to increasing the value of your pharmacy is having a plan. Chris Cella, RPh, McKesson’s Vice President of RxOwnership for the northeast region, says, “The more time you spend planning, the better the outcome.” But Cella has seen that at times, owners decide they want to sell their store relatively quickly, which is not consistent with maximizing a pharmacy’s value.
By understanding what drives a pharmacy’s value, by preparing a long-term plan, and by taking a few simple steps, it is possible to increase your pharmacy’s value.