IF Business Broking Pharmacy broker blog

Buying a small pharmacy | What are they worth now?

by Ian Fedrick
in Business
11 Jun 2012
Ian Fedrick

How much is a small pharmacy business worth?

The amount a pharmacy is worth is determined by what a willing and motivated buyer is prepared to pay for the pharmacy business.

Like everything in life, this can sometimes be a different amount to the value placed on the pharmacy by the owner.

Calculating the value of a pharmacy

If the pharmacy is profitable the business would be valued using the same principle as any pharmacy.

This is worked out as a capitalisation of net profit, sometimes expressed as a multiple of future maintainable earnings (FME). Depending on the location and make-up of the business, the multiples in QLD range from 5 to 6.5 generally speaking.

The effect of PBS on pharmacy values

Since the 16th April 2012, the deadline for last applications to Medicare for a long distance relocation of a PBS approval number. things have changed.

You can no longer assign or nominate a value to your PBS number as part of the sum of assets method of valuing a pharmacy business. An approval number is no longer a commodity that can be traded around Australia as it had been pre 16 April 2012. The only relocation now is a 1 km short relocation of an existing approved pharmacy.

Example - how valuing a pharmacy has changed 

Take a small pharmacy with a net profit after adjustments of $50,000. Let's look at the value of this pharmacy now by the 2 methods - capitalisation and sum of the assets compared to 12 months ago.

Pre PBS changes, the base or fall-back value for a pharmacy small or large if it was not profitable was:

Approval number ($500,000) + stock and fixtures & fittings.

$500,000 (Approval Number) + $100,000 Stock + $20,000 F & F = $620,000

Post PBS changes, if your pharmacy is in that position then the only assets are the stock and equipment.

$50,000 x 5.88 (17% cap rate) = $294,000

Sum of the assets = $100,000 Stock + $20,000 F & F = $120,000

Much has changed for pharmacies

These new valuations are why a number of owners made the decision in the last nine months to close their pharmacy and sell off their PBS approval number for long relocation while they could.  They felt $450,000 was better than what an owner would get if they held on and sold the pharmacy as a going concern.

Small modestly profitable pharmacies vs new pharmacies 

With a motivated owner/operator I believe small pharmacies do have a future, even in the challenging economic and competitive conditions the pharmacy industry is faced with today.

They are a great entry point for first time buyers.

Even at, say $400,000 with 80% LVR, it still requires the buyer to come up with $80,000 plus transaction costs.

For young first time buyer’s $80,000 deposit or equity is more achievable then the $130,000 required in the past for an entry level business costing $650,000.

To open a new pharmacy opportunities are more restricted now under the new rules. Plus, the high cost of entry into a shopping centre or large medical centre site is prohibitive for an inexperienced first time owner.

You are much better off applying your drive, ambition and entrepreneurial spirit to a pharmacy you can afford that has sales and a cash flow from day one.  

As you may have discovered in my young pharmacist interviews, there are plenty of small pharmacy success stories happening all around Queensland and NSW.

If you'd like some expert guidance and advice around buying a pharmacy of your own, I'm always here to help.

Written by: Ian Fedrick
May 2012

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