Using Multiples for Pharmacy Business Valuations in Utah

By Brad MacLiver
Authorship and profile at Google


Anybody who has purchased a home should be familiar with real estate appraisals. With a UT pharmacy business there are times when both the real estate and the business itself needs to be appraised. The pharmacy business appraisal, which does not include the real estate, is more commonly called a Pharmacy Business Valuation.

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

There are a number of accepted methods for valuing a retail drug store business. Each method has its own perspective and the business owner should have a reasonable understanding of the method being used.

One simple method is to use “multipliers” This is when someone takes the net profit, gross sales, or some other figure from the financial statements and then multiplies that number by 3, 5, 8 times (whatever the case may be). 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 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 Utah pharmacy industry. Reduced profits means it will be harder for businesses to service debt.  That means it will be harder to obtain funding, and whatever funding is available will be in lower amounts. Someone who is not a specialist in the pharmacy industry and uses a gross sales multiplier would get a calculation that would be way off when compared to other UT pharmacy valuations. A banker who sees a valuation that is not within realistic comparisons in the industry will not fund the deal.  Any fees paid for the business valuation will have been pointless.

When it is necessary to have a pharmacy business valuation completed in Utah, it is strongly recommended to pay the extra amount for a specialist who can provide a banker with realistic and current information. Don’t try to save a few pennies by cutting corners, which will only end up wasting your time, your money, and possibly even ruin chances to obtain funding that either the pharmacy business owner or pharmacy could put to use.

 

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