Using Multiples in Pharmacy Business Valuations in Arizona

By Brad MacLiver
Authorship and profile at Google


Anyone that has purchased a residence will be familiar with real estate appraisals. With an AZ pharmacy business, there are times when both the business itself and real estate needs to be appraised. This pharmacy business appraisal will not include the real estate and is more commonly called a Pharmacy Business Valuation.

Arizona Pharmacy Business Valuations are part of the due diligence that will be conducted when there is a possible acquisition of the AZ pharmacy business, or a form of pharmacy financing is needed. Pharmacy Business Valuations place a suitable market value on the drug store after thought and consideration have been given to factors such as (but not limited to): the pharmacy's assets, financial statements, tax returns, goodwill, customer lists, licensing, competitive advantages, regulatory concerns, management team, industry comparisons, and inventories.

There are a variety of methods for valuing a retail drug store business. Each method has its own issues and the business owner should have a decent understanding of the method being used.

One of the simpler methods is to use “multipliers.”  This is when the net profit, gross sales, or some other figure from the financial statements is multiplied by 3, 5, 8 times or whatever the case may necessitate.  However, when using simple methods such as multipliers you need to understand a few points:

1. Financial statements are typically prepared to justify the lowest possible taxes.

2. Stated profits are not usually the actual cash flow of the company.

3. Due to tax reasons company assets probably have a different value than what is on the books.

Understanding the above points, you can understand that a simple Arizona pharmacy valuation based on multiples may not reflect the true market value of the drug store.

When financing is involved simple multiplier methods will not be acceptable. Banks and finance companies will require a third party unbiased pharmacy valuation completed using advanced calculations, knowledge of the industry, and sound financial reasoning.

When a company specializes in a specific industry, that company will be able to offer a more precise and credible valuation. Specialists usually have more industry data than someone who does not normally value businesses in that industry. The results of not having the proper industry data will result in a more ambiguous valuation.

Due to the aging population sales are increasing as the older generations are purchasing more prescriptions. However at the same time, government and insurance reimbursements have been drastically reduced causing a major decline in nets profits for the Arizona pharmacy industry. Lower profits means it is harder for the business to service debt. That in turn means it is harder to obtain funding, and when there is funding it will be in lower amounts. Someone who is not a pharmacy specialist and used a gross sales multiplier would be way off in their calculation compared to other pharmacy valuations. A banker that sees valuations that are not within realistic industry comparisons is not going to fund the deal and fees paid for the business valuation will have been wasted.

When it is necessary to have a pharmacy business valuation completed, it is strongly advised to pay more for a specialist that can provide a banker realistic and current information. Don’t try and save a few bucks by cutting corners, and then end up wasting time, money, and possibly even ruin a chance of obtaining funding that either the pharmacy business owner in AZ, or pharmacy buyer was seeking.

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