How Much Is My Pharmacy Worth? A Guide to Pharmacy Valuation

How much is a pharmacy worth?

Two pharmacies with similar turnover – or even similar EBITDA – can therefore have very different market values. At Hutchings Consultants, we specialise exclusively in the pharmacy market. Our valuations combine financial analysis with pharmacy-specific market knowledge and evidence from current buyer activity, helping owners understand not only what the business earns, but how the market’s likely to value those earnings.

There’s no single formula, fixed multiple or online pharmacy valuation calculator that can accurately value every pharmacy.

At its simplest, a pharmacy business valuation considers two closely linked questions:

• What level of sustainable profit does the pharmacy generate?
• What value is the market likely to place on those profits, given the characteristics and risks of the business?

The first question is largely financial. The second is commercial. That’s why applying a standard percentage of turnover, a fixed pence-in-the-pound figure or a single EBITDA multiple can be misleading when used in isolation.

Two pharmacies with similar turnover can have very different values because their underlying profitability may be very different. Staffing costs, opening hours and other operating expenses can have a significant impact on the adjusted EBITDA generated from that turnover.

Equally, two pharmacies with similar adjusted EBITDA can still achieve different valuations. Factors such as location, purchaser demand, lease terms, the diversity and sustainability of prescription sources, competition and other identifiable risks can influence the multiple that buyers are prepared to pay for those earnings.

The question is therefore not simply “how profitable is the pharmacy?” but also “how attractive and sustainable are those profits to a purchaser?”

How is a pharmacy valued?

A pharmacy valuation normally starts with the financial performance of the business, using the latest statutory accounts together with up-to-date management and trading information where available. The objective’s to establish a realistic picture of the pharmacy’s maintainable earnings and then assess those earnings in the context of the wider market.

EBITDA and adjusted profitability

EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortisation. It’s widely used as a measure of operating profitability because it removes the effect of financing structure, tax and certain non-cash accounting charges, making it easier to compare the underlying performance of different businesses.

In pharmacy transactions, buyers and lenders will often look closely at EBITDA and, more importantly, adjusted or maintainable EBITDA. Banks considering acquisition finance are primarily interested in whether the pharmacy generates sufficient sustainable earnings and cash flow to support the proposed borrowing. EBITDA can therefore be an important part of both the buyer’s assessment and the lender’s underwriting process.

However, the EBITDA shown in statutory accounts does not always represent the profit a purchaser will inherit. A valuation may need to consider legitimate adjustments for matters such as:

• owner-specific remuneration or costs;
• exceptional or one-off expenditure;
• non-recurring income;
• staffing levels and the realistic cost of operating the pharmacy after a sale;
• connected-party or unusual property costs; and
• other items which do not fairly reflect the ongoing trading performance of the business.

The aim’s not to maximise the EBITDA figure. It’s to establish a defensible level of maintainable earnings that an informed purchaser and where relevant, a lender can understand and test.

What EBITDA multiple is used to value a pharmacy?

There is no single EBITDA multiple that applies to every pharmacy. The appropriate level can vary materially according to the quality and sustainability of earnings, location, purchaser demand, dispensing profile, staffing, opening hours, property terms, income mix, growth prospects and perceived risk.

A multiple is only meaningful if the underlying EBITDA has been calculated correctly and if the multiple reflects the individual pharmacy and prevailing market conditions.

The same principle applies to other market benchmarks. Pence-in-the-pound of turnover, monthly item volumes and comparable sale prices can all be useful cross-checks, but none should be treated as a substitute for a pharmacy-specific valuation.

Goodwill explained

For most community pharmacies, a substantial part of the business value relates to goodwill rather than simply stock, fixtures and fittings. Goodwill represents the value of the established business and its ability to generate future earnings.

That goodwill may be supported by the pharmacy’s prescription base, local position, relationship with nearby prescribers, trading history, services, reputation and the overall sustainability of its income. It should not, however, just be treated as a fixed percentage of turnover. The value ultimately depends on the quality of the business and the level of demand it’s likely to attract.

Valuation methods

In practice, a pharmacy valuation may draw on several forms of evidence rather than relying on one calculation alone.

• Profitability-based assessment – sustainable or adjusted earnings are assessed and considered against an appropriate market multiple.
• Market comparison – the pharmacy is compared with relevant transactions and current market evidence, allowing for differences in location, earnings, dispensing profile and business characteristics.
• Goodwill assessment – the value attributable to the ongoing pharmacy business is considered separately from stock, fixtures and fittings and where applicable, freehold property.
• Other market benchmarks – measures such as turnover, dispensing volume and pence-in-the-pound evidence may be used as cross-checks where appropriate.

A robust pharmacy sale valuation therefore combines financial analysis with specialist judgement and current market evidence.

Standard-hours and extended-hours pharmacies

Opening hours can have a material effect on value because they influence staffing requirements, operating costs and the practical appeal of the business to different types of purchaser.

Extended-hours pharmacies can still be highly saleable where they are profitable and the operating model is sustainable. The effect on value should therefore be assessed from the actual economics and marketability of the pharmacy rather than by applying an automatic discount simply because of its opening hours.

 

What affects your pharmacy valuation?

Adjusted profitability is central to valuation, but it is only part of the picture. The following factors can materially influence what a purchaser’s prepared to pay.

Location and buyer demand

Purchaser demand varies significantly across the UK and can also vary within a relatively small local area. Proximity to GP surgeries or health centres, demographics, access, parking, local development and the number and strength of competing pharmacies can all affect marketability.

A location which attracts several credible purchasers can support competitive bidding. A pharmacy in a less sought-after area may require a different approach even where its financial performance is strong.

Dispensing volume and prescription sources

Monthly NHS item volumes remain an important indicator, but the source and sustainability of those prescriptions can be just as important as the headline number.

A purchaser will want to understand where prescriptions originate and whether the pharmacy is overly dependent on a single surgery, care homes or other concentrated sources of business. A diversified, stable prescription base may be viewed more favourably than income which could be materially affected by one external change.

NHS, private, services and OTC income

Community pharmacies increasingly generate revenue from several sources. NHS dispensing remains central to many businesses, while clinical services, private activity and OTC sales may make an important contribution.

For valuation purposes, the key questions are profitability, sustainability and transferability. A pound of turnover from one activity is not automatically worth the same as a pound of turnover from another.

Staffing and operating costs

Staffing is one of the largest costs in most pharmacies and can have a significant effect on EBITDA. Buyers will look not only at total payroll but at the staffing model required to operate the business safely and effectively after completion.

An overstaffed business may offer potential savings, but a purchaser may not attribute full value to improvements they must make themselves. Equally, a pharmacy running on an unsustainably low staffing base may require additional cost after acquisition.

Lease terms and property

For a leasehold pharmacy, rent, remaining lease term, renewal rights, repairing obligations, rent reviews and any unusual or onerous clauses can materially affect value and financeability.

Purchasers and lenders want sufficient security of occupation. Where the premises are freehold, the property value will normally need to be considered separately from the goodwill value of the pharmacy business.

Competition and local changes

Existing competition is relevant, but the number of nearby pharmacies alone doesn’t tell the whole story. The location of GP surgeries, potential relocations, local health-centre developments and other changes to healthcare provision can alter the outlook for a pharmacy.

Valuation therefore requires a forward-looking assessment of identifiable risks as well as historic financial performance.

Care homes and concentration risk

Care-home business and other large prescription sources can be valuable, but purchasers may examine them carefully where a significant proportion of revenue or profit depends on a small number of relationships.

The issue isn’t that care-home business is inherently less valuable; it is the degree of concentration and the risk that the income could change or be lost following a contract review, tender or change of ownership.

Why get a professional pharmacy valuation?

A valuation is useful long before a pharmacy is placed on the market. It can help an owner understand the current value of the business, the factors supporting or constraining that value and the changes that may improve marketability before a sale.

This can be particularly valuable two or three years before an intended disposal. Improvements made immediately before marketing may not have had time to feed through into the accounts or establish a clear trading trend. Earlier planning gives an owner more opportunity to address staffing, lease, profitability or operational issues before buyers scrutinise the business.

A formal valuation may also be required for purposes such as shareholder changes, divorce, tax planning, acquisition, restructuring or consolidation. Where a valuation is required for a specific legal, tax, accounting or lending purpose, the required basis and format should be confirmed at the outset.

What is the difference between a valuation and the price my pharmacy will actually sell for?

A professional valuation is an informed assessment of market value. It is not a guarantee that the pharmacy will sell for exactly that figure.

Ultimately, the achievable sale price is determined by the market: what credible purchasers are prepared to offer and what the seller is prepared to accept. A well-run competitive sale process can reveal levels of demand that may not be obvious from a theoretical calculation alone. Equally, due diligence may identify issues that affect the price a buyer is willing to pay.

For an owner contemplating a sale, the most useful valuation therefore combines defensible financial analysis with evidence of current purchaser demand.