A pharmacy’s value is made up of tangible and intangible assets. Tangible assets include inventory, furniture, fixtures equipment (FF&E), accounts receivable (A/R), and sometimes real estate (RE). Tangible assets are generally valued by a physical count (inventory & A/R), a book value for FF&E, and an appraised value for RE. A pharmacy’s intangible assets (goodwill) are, by definition, less exact to value. Though the ultimate selling price is determined by a negotiation between the buyer and seller, an initial valuation can be done by use of a formula. Historically, there have been many formulas, but in today’s market, two are common. Chains value pharmacies on a price per prescription filled in the past 12 months, plus inventory. Independent buyers and sellers generally value pharmacies by a business’ enterprise value. The enterprise value is calculated by a multiple of normalized EBITDA, or Net Operating Income (NOI), plus the tangible assets. Generally, the multiple of NOI ranges from 1.5x to 4x, with 3x the average. The multiplier is affected by a number of factors, with the most important being the market forces of supply and demand, as well as these listed below:
- How is the pharmacy trending? Are sales increasing? Decreasing? Level? How are margins and profits trending?
- Are the pharmacy’s revenue streams sustainable?
- Is there opportunity to grow the business? Is it scalable?
- Are the pharmacy’s revenues diversified (retail, LTC, compounding, DME, services/education, etc.)?
- Is there a concentration risk? Is the pharmacy overly reliant on:- A single or a few customers, such as a few large LTC facilities?
– A single or a few referral sources, such as a clinic or physician group?
– A single or a few payors, such as a hospital, insurance company, Medicaid, 340B?
– A single employee, including the seller?
- How is the local community and economy? Is it growing, stagnant, or declining?
- What is the local competition? Are there chains, grocery stores, and other independents nearby?
- Is the pharmacy in good repair or is it in need of a remodel?
- Is the inventory current or is it out-of-date and shop-worn?
- What is the rent or lease terms?
- The structure of a deal is often overlooked; price is a function of the terms. Is it an all cash deal, or is the seller providing a significant part of the financing through a seller note? If so, what are the terms and conditions of the note?
- Is the seller highly motivated? Is the buyer highly motivated?
- Does the acquisition create synergies for the buyer in purchasing, staffing, management, marketing, products, or services?
- Does the acquisition consolidate or eliminate a local competitor?
- Is there potential to expand the business? Many sellers will dwell on the potential of the business and ask for a price based upon the future. Make certain to pay for historical performance rather than potential. However, a pharmacy with significant growth potential is worth more than a pharmacy with limited growth potential.
- Is the buyer familiar with the pharmacy (i.e., an associate)? Though an associate may feel entitled to a significant discount, the pharmacy may be worth more to an associate as they know the customers and the employees and there may be little transition. They can hit the ground running.