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4 top questions to determine the value of your pharmacy

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Whether you are a pharmacy owner or a potential pharmacy buyer, it is always important to understand what a pharmacy business may be worth. 

By Mike Jaczko

While many conventions are used to place a value on a pharmacy business, there are many myths preventing pharmacists (and others) from using the proper methods.

Understanding current trends and finding the appropriate methods can help you determine the value of a pharmacy.

Here are the questions you need to ask:

1. What are the most common methods used to valuate a Canadian retail pharmacy?

2. What is the general difference between an asset and share deal?

3. Do you understand the importance of cash flow in two of the most respected valuation methods?

4. What are the synergies between improving store cash flow and adding intrinsic value to your pharmacy business?

Pharmacy owners must determine the appropriate and meaningful valuation metrics to use for valuing their particular pharmacy business.

In the retail drugstore business, dollars per scripts (a price to revenue model) are often quoted, but in reality a multiple of EBITDA (earnings before interest, taxes and depreciation) is often used.

Owners need to inform themselves where possible about comparable transactions. This is similar to looking at comparable residential real estate trades when selling a home, and can provide direction on valuation.

Often pharmacy owners will employ the services of their accountant while others may choose to engage an accredited business valuator. Finding someone with proven experience in valuating a retail pharmacy business can pose a challenge in some cases.

It is essential to find a professional with the expertise to combine a historical financial review, real estate considerations (if applicable), market conditions as well as intangibles such as local market situations.

Ultimately, the more dominant and important (i.e. strategic)  the business in your marketplace, the more opportunities for growth, and the more a potential purchaser desires your particular business are the key characteristics in determining the price and possible premium a suitor is willing to pay.

Remember, value remains in the eye of the purchaser, not in what you as the vendor believe your pharmacy is worth! Keeping that in mind, smart pharmacy business owners plan an exit strategy and realize there is no more important challenge for their business than to ensure maximum value.

Some pharmacy owners are disappointed to discover that valuations do not reflect the time and personal commitment spent in the building of their practice. Early planning can ease this disappointment by identifying actual value and providing the opportunity to take steps to increase value well in advance of actually putting a business into play.

Mike Jaczko is a partner and portfolio manager with K. J. Harrison & Partners Inc.