How to Value a Pharmacy
Pharmacies sell various health products such as prescriptions, medications, beauty products, and consumable goods. These businesses are a vital part of the healthcare industry. As such, there is a steady demand for pharmacies. In recent years, the pharmaceutical industry generated over $6.5 billion dollars in sales revenue. In addition, the industry has healthy profit margins. We can expect these trends to continue moving forward. These conditions are ideal if you are looking to buy, grow, or sell a pharmacy. However, this industry comes with various challenges including intense competition. To succeed, it is beneficial to understand how to value a pharmacy.
There are many benefits that come with learning how to value a pharmacy. The best way to do so is to receive a business appraisal. As part of a business appraisal, a valuation analyst helps you understand the fair market value of a pharmacy. With this information, you can begin to increase the value of a pharmacy you are buying or selling.
Peak Business Valuation is a professional business appraiser. We work with pharmacies on a regular basis. Peak Business Valuation can provide you with a business appraisal for a pharmacy. In addition, we welcome any questions you may have about how to value a pharmacy. Start by scheduling a free consultation with Peak Business Valuation below.
How to Value a Pharmacy
Peak Business Valuation often uses the market approach and/or the income approach to value a pharmacy. These valuation approaches provide different perspectives of a pharmacy’s value. Business appraisers determine which method is best for your pharmacy by considering various factors. This can include the purpose of the valuation, the size of the pharmacy, and the type of business transaction. In many cases, the valuation process involves a combination of valuation approaches.
Valuing a Pharmacy Using the Market Approach
The market approach involves comparing a pharmacy to similar businesses that have recently sold in the market. It looks at pharmacies with a similar size, location, customer base, and other factors. If the pharmacy is a private business, valuation experts use private transaction databases to gather relevant information. The market approach is common when determining the value of a pharmacy.
Multiples for a Pharmacy
Valuation multiples are a crucial component of the market approach. Multiples are financial ratios that compare a business’s value to financial metrics such as earnings, sales, or cash flow. To determine the multiples for a pharmacy, business appraisers use the proper NAICS or SIC code. In the following paragraph, we discuss how to value a pharmacy using common valuation multiples for a pharmacy.
SDE (Seller’s Discretionary Earnings) Multiple for a Pharmacy
- The SDE multiple helps determine the value of a pharmacy based on its earnings. The multiple is applied to the seller’s discretionary earnings of a pharmacy to calculate a fair market value.
EBITDA Multiple for a Pharmacy
- The EBITDA multiple measures the value of a pharmacy based on its earnings before interest, taxes, depreciation, and amortization. This helps a pharmacy understand the return on investment it can expect to generate.
REVENUE or SALES Multiple for a Pharmacy
- The revenue multiple assesses the value of a pharmacy relative to its total sales. Business appraisers multiply the total sales of a pharmacy to the multiple to determine its fair market value. This multiple is less common when valuing a pharmacy.
To determine which multiple is most suitable for your pharmacy, there are many factors to consider. To learn more, see Valuing a Pharmacy. In addition, obtain a business valuation from a reputable business appraiser. Peak Business Valuation is happy to help! Schedule a free consultation with Peak Business Valuation, business appraiser, today!
Valuing a Pharmacy Using the Income Approach
The income approach is another popular method for valuing a pharmacy. This method assesses the value of a pharmacy based on the future income or cash flow potential it expects. The income approach also involves an assessment of the risks associated with buying or selling a pharmacy. Below, we highlight a few risks that a business appraiser may consider when determining how to value a pharmacy under the income approach.
- Location: The location of a pharmacy affects its value in various ways. It is best for pharmacies to be located in convenient and accessible locations.
- Financial Strength: Pharmacies can have high operating costs. As such, it is important for pharmacies to develop financial strength through effective planning.
- Regulatory Compliance: There are many regulations in the pharmaceutical industry. It is vital to be aware of and comply with these regulations to avoid legal penalties.
- Competition: The pharmaceutical industry is very competitive. Operators need to find ways to differentiate from competitors to succeed.
Methods to Value a Pharmacy Using the Income Approach
There are several variations for how to value a pharmacy under the income approach. Two common methods are the capitalization of cash flow method and the discounted cash flow method. Both of these methods assess a pharmacy’s value based on its income potential. We discuss these methods in the following paragraphs.
Capitalization of Cash Flow Method
- The capitalization of cash flow method is best for stable businesses with steady earnings. This method calculates the value of a pharmacy by dividing its expected future earnings by a capitalization rate. The capitalization rate represents the desired rate of return for a pharmacy. The capitalization of cash flow method also assesses the risks associated with the pharmacy. We discuss some of these risks in the previous section.
Discounted Cash Flow Method
- The discounted cash flow method projects a pharmacy’s future cash flows over a 3-5 year period. These projections are then discounted using a discount rate rather than a capitalization rate. This process calculates the present value of a pharmacy. Typically, the discounted cash flow method is ideal for businesses with a strong financial history. It is also beneficial for businesses that have built reliable forecasts. However, it is important to note that this method relies on future cash flow methods which can be subjective. As such, this method is less reliable.
Summary
When valuing a pharmacy, business appraisers may use various valuation methods. Often, they use the market approach and/or the income approach. These methods present important information to help an expert determine the value of a pharmacy. To know which method is best for your pharmacy, receive a business appraisal. As part of a business appraisal, you will also learn about the risks and benefits of your pharmacy. This is helpful whether you are buying, growing, or selling a pharmacy.
Peak Business Valuation, business appraiser, works with pharmacies on a regular basis. We are passionate about helping businesses find success. Peak is happy to provide you with a business appraisal for a pharmacy. We can also answer any questions you have about how to value a pharmacy. Start now by scheduling a free consultation with Peak Business Valuation below!
See also Valuing a Pharmacy, Valuing a Drugstore or Pharmacy, and Value Drivers for a Pharmacy.
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