How do I work out the value of my pharmacy?
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If you’re thinking of selling your pharmacy business, or have been made an offer on your pharmacy, the first thing you will need to do is find out the true value of your business. There are different ways of going about this but the two main methods of determining pharmacy valuation are
a) a calculation based on past net profit (also referred to as ‘traditional’ valuation) and,
b) goodwill valuation.
There are also property issues to take into account. If your business operates in leasehold premises it is unlikely that a buyer will pay a premium to take on the lease. This may be negotiated separately. If you own the freehold of the property you have the option to either sell the freehold with the business, or to make a leasehold agreement with the buyer. The decision here depends very much on individual circumstances and the reason for sale, and shouldn’t be confused with valuing a pharmacy business itself.
Traditional valuation
The traditional valuation method is a model used more for businesses in general, and while it will give you a good ballpark figure of your dispensing pharmacy valuation, it should not be used as the only method of calculating the value of your pharmacy.
A valuation is arrived at by calculating the true net profit of your business, then multiplying this figure. Depending on the state of the market, the net profit could be multiplied by a factor of between five and eight. The true net profit of your business is the gross profit minus overheads. These overheads are rent or property costs, utility bills and business rates, staff costs and other outgoings necessary to keep the business running. They don’t include pension payments, personal insurance or any other costs related directly to the owner of the business.
Goodwill pharmacy valuation
Goodwill valuations for pharmacies are calculated taking into account a number of factors. These include:
A goodwill valuation will usually include the going rate for any fixtures and fittings as well as any stock that is included in the sale. A recent refurbishment could increase the goodwill valuation of your pharmacy business. Although turnover is not the only factor at play in a goodwill pharmacy valuation, it can help establish a ballpark price for the business. Generally speaking, in the current pharmacy marketplace (now a seller’s marketplace), a pharmacy with a turnover of less than £250,000 per annum can expect to be valued at anywhere between 30 and 50 per cent of the turnover. Businesses turning over up to £500,000 can expect to receive a valuation of around 50 to 70 per cent of the turnover. Businesses turning over in excess of £1,000,000 per annum can expect a valuation of anywhere between 90 and 150 per cent of that turnover figure. It is a good idea to calculate a pharmacy valuation using this rough guide as well as using the traditional valuation method above to give you an idea of the value of your pharmacy business.
Factors affecting pharmacy valuation
Pharmacy values are affected by several factors that are specific to the pharmacy industry, as well as by factors that are applicable to every business. All business valuations are subject to positive or negative influence from competition, business opening hours, location and turnover. However, these can still be specific to pharmacies.
If the pharmacy is open 60 hours as opposed to 100 hours, this will negatively affect the valuation, as there is less selling time. If there is another pharmacy nearby which holds longer opening hours this means not only competition on price and service, but competition on hours as well. Customers used to having convenient opening hours are likely to use a business that keeps to these hours than one which does not; more so if that competing pharmacy is nearby. A 100 hour pharmacy valuation will be significantly higher than a 60 hour pharmacy valuation, even if the other factors affecting valuation are very similar.
Another location factor, this time specific to the pharmacy industry, is the placement of the pharmacy within, or very close to health centres. Businesses which are conveniently placed to pick up business from NHS prescriptions are worth more than those which are not. Although the profit margin is higher on counter sales than dispensing sales, when you have a higher footfall the possibility of accompanying counter sales is greatly increased so health centre pharmacy valuations are generally higher than for those on the high street.
Turnover under £400,000 per annum will result in a lower pharmacy valuation even if the other factors are generally positive. If the turnover is more than £750,000 per annum the valuation will be higher (although, if on investigation the overheads are prohibitive even a high turnover doesn’t guarantee and high valuation). Pharmacies with a low turnover but the potential for better business development might achieve a higher valuation than the initial calculations suggest if it can be proved that there are secure development opportunities available.
Factors specific to pharmacy valuations include the split of sales between NHS dispensing and over-the-counter sales (and within this, the split between generic and branded drugs being prescribed, although this factor is influenced mainly by the local doctors), nursing home income, proximity to local doctors and the prospects of them continuing practice (a very real concern in rural areas), and the actual cost of sales.
Although dispensing pharmacies depend on NHS prescriptions to stay in business, the valuation of a dispensing pharmacy is affected by the split between dispensing and counter sales. A high volume of NHS based turnover is desirable, even though the gross profit margin is much higher on counter sales (30-35% on counter sales compared to 18-22% on dispensing sales). A typical ratio of NHS to counter sales is 80:20.
Similarly, within the field of NHS dispensing turnover, there is a much greater profit margin on generic medicines than on branded medicines. This is an important factor to bear in mind, as even with a high volume of NHS turnover, there can still be a relatively poor profit margin if these prescriptions are all for branded products.
Nursing home income (or rather, the percentage of the turnover which comes from contracts with nursing homes) also affects the dispensing pharmacy valuation. New buyers may not want to be tied into a contract with a nursing home, or may not be able to retain the business from the home. Although it is fairly reliable income, as nursing home business are subject to factors beyond the control of the pharmacy owner, they should not be seen as a positive factor in the valuation of a pharmacy.
Pharmacies often qualify for discounts on products from suppliers and it is worth knowing whether this is being taken up, as this can drive the actual cost of sales down, pushing the profit margins up.
A final factor specific to the valuation of pharmacies is the cost of locum cover. While this can be considered a staffing cost, the cost of employing a locum pharmacist is much higher than the cost of employing temporary counter staff to cover holidays or illness. At least six weeks of locum cover should be factored into the valuation figure, and this is dependent on the location and wages that are expected there.
A good way to increase the valuation figure on your pharmacy is to provide a clear information pack for prospective buyers detailing the accounts, history of the business, projections for the future, details of any of the positive factors above, copies of NHS statements and leasehold or freehold documents. Presenting a buyer with everything they need to make an informed choice makes your pharmacy business a more attractive prospect.
