Valuing a Pharmacy
This past week, Peak has had the opportunity to value a couple of pharmacies. Pharmacies operate in a similar manner, but most pharmacies in the United States are associated with large public companies. As such, valuing a pharmacy is rare in my book since most pharmacies operate within a CVS or Walgreens. The pharmacy and drug store industry is one of the fastest-growing and most profitable sectors in the United States. Due to the aging population, the industry is expected to grow exponentially over the next decade. As the industry expands and price stability influences demand, pharmacies and drug stores represent an attractive industry.
There are around 57,521 pharmacies in America. On average, they see a 6.0% profit margin. Profit margin ranges based on whether one is operating a standalone pharmacy versus a CVS, Rite Aid, or Walgreens. As such, those three companies control approximately 68% of the market. However, most standalone pharmacies are successful. A successful pharmacy will bring in around $2.75 million in prescription sales every year. Nearly 37.0% of clients are between the ages of 45-64. As baby boomers continue to age, that number is only going to increase. As of September 2018, individuals aged 65 and older are forecasted to account for 26.0% of total revenue in 2018.
Most standalone pharmacies are operated by individuals in their 50’s and 60’s. With the current M&A activity in the market, it might be time to consider an exit strategy for your pharmacy. Current industry trends point towards further growth, which provides a great opportunity to sell now. The first step to selling your business is obtaining a business valuation. Whether you are looking to sell or hold on to your company, understanding the market value of your business is important. A valuation specialist will show you a range of values for your business and consult with you on how to increase the value of your business.
Over the past five years, Peak has provided business valuations for several pharmacies for various valuation purposes. To give you an idea of each of those engagements, I will list out some of the key factors used in valuing a property management firm. Keep in mind that the factors listed below are only a guide.
Market Multiples used in Valuing a Pharmacy
- Annual Revenue: 0.25x – 0.50x, including inventory
- Seller’s Discretionary Earnings: 5.0x – 8.0x, including inventory
With a clearer understanding of what your business is worth, you can begin taking steps to increase the value of your pharmacy prior to a potential sale. I will touch on several ways in which you can increase the value of your business. There are many factors to take into consideration, but this will provide you with the basis of what your company is worth and a few ideas to increase your company’s value. If you are searching for a more extensive valuation, reach out to a valuation professional like Peak Business Valuation, business appraiser Utah.
There are several success factors that help when valuing a pharmacy:
1. Ability to Control Stock on Hand
- Stock controls must be used to manage ideal inventory levels and increase sales. Inventory management can help retailers track the items customers are demanding and ensure these goods are available for purchase.
2. Superior Financial Management and Debt Management
- Financial management in any retail store can be a sign of a company’s health. Understanding and monitoring cash flow can enable a business owner to anticipate future needs and evaluate growth options.
3. Easy Access for Clients
- Convenience is the most cited reason for shopping at a particular drug store. For this reason, industry owners focus on locations and merchandising that will save consumers time without an unreasonable price penalty.
4. Proximity to Key Markets
- Drug stores should be located close to consumers (to reduce travel times) and to other stores or service providers (e.g. hospitals) to increase foot traffic.
5. Participation in Pharmacy Benefit Management (PBM) Networks
- A PBM is a third-party administrator of prescription drug programs. It is responsible for contracting with pharmacies and directing clients to certain stores. Industry companies must operate within PBM networks to gain customers.
6. Experienced Workforce
- Successful operators must staff employees with the accreditation to give medication advice to consumers. A knowledgeable front-end staff is also essential to provide efficient transactions and consumer product advice.
Understanding the value of your pharmacy is important, regardless of any near future transactions. Even if you have not thought about selling your business, consider the future of your business; it is never too early to start planning. The first step in that process is a business valuation, which we are happy to provide you with. We can also help to identify ways to increase the value of your business.
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