How to value a pharmacy business

If you’re thinking about buying or selling a pharmacy, you’ll need to be clued up on how a pharmacy is valued and what you need to know before making any final decisions. Whilst there are a number of factors to consider when buying a business, it’s important to know the specifics of pharmacy valuations.

Valuing a pharmacy business based on profit requires you to look at the earnings before interest, tax, depreciation and amortisation (EBITDA). To arrive at a valuation a multiple of EBITDA is used (for a pharmacy this may be a multiple in the region of five to eight times).

What does the business offer?

When looking at the acquisition of a pharmacy business, it’s important to acknowledge how the business currently functions on a day to day basis, as well as an all-around view of the business activities. Several factors are taken in to determine how the business will be valued, such as location, leases and opportunity for growth.

Buyers and sellers have different needs and wants for a business, so it’s crucial to identify what the business you are looking to buy or sell can offer. Below are examples of two pharmacy businesses and how their valuation is determined based on their circumstances.

Pharmacy One

The facts

Let’s say there’s a pharmacy in a rural location that trades over 50 hours per week. It primarily focuses on over-the-counter sales making the staff costs low. There is still 10 years left on the lease which is also renewable. There is a good opportunity to develop the business and grow over those years.

The pros

All these factors contribute to the overall valuation of the business, which may make it an ideal investment for buyers who are looking for a low price tag and a good profit. This example suggests that low staff costs and over-the-counter sales can make this a realistic business opportunity. This can then generate higher offers (premium offers) as it falls within the buyer’s budget and has good opportunities for growth and development.

The cons

However, these businesses might also struggle to sell because of their rural location – some buyers may feel that there may not be enough profit generated from the business to make an offer, or they’re concerned about the nature of the business itself and the longevity of it as a profitable business.

Pharmacy Two

The facts

There is a pharmacy business located in London, nearby a doctor’s surgery. Staff costs are high and business trading hours are over 70 per week. They work with care homes too, providing 10% of the items in the business. They also have a monitored dosage system which means that the pharmacy is reliant on specialist staff, making staff costs higher.

The pros

Compared to the business in example one, this business will cost significantly higher due to the fact that there are nearby amenities and the demand of a pharmacy in the area, as well as a longer weekly trade hours. It’s more than likely to turnaround a good profit and offer the buyer plenty of opportunities for growth.

The cons

Whilst this could been seen as a lucrative investment by some buyers, any other buyers who want the security of a 10 year lease, like in example one, may choose to look elsewhere. There also needs to be a careful breakdown of how much profit is coming from the care homes versus how much is being spent on those costs. There is also the threat of a staff costs and higher trading hours impacting the overall profit the business could generate, despite the popularity of the location.

Before even thinking about buying or selling a pharmacy, it’s important to take into account how all of these factors will contribute to the valuation and inform you of how much the pharmacy business in question will generate as a sound business, whether buying or selling. Getting the right advice is crucial for the processes that need to be undertaken with regards to ownership and tax planning, and this can be the defining factor in whether your pharmacy is successful or not. Plan ahead, have a good team of trusted advisors and you’ll be good to go!

If you need help buying a business or selling a business, Haines Watts will help you every step of the way. Get in touch to find out more.