Using Multiples for Pharmacy Business Valuations in Maryland

By Brad MacLiver
Authorship and profile at Google


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

MD Pharmacy Business Valuations are part of the due diligence that will be conducted when there is a possible acquisition of the pharmacy business, or it is necessary to have pharmacy financing. Pharmacy Business Valuations set a reasonable market value on the drug store after various factors have been considered, 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 acceptable methods when valuing a retail drug store business and each method has its own advantages.  The business owner should have a decent understanding of the method being used.

One simple method involves using “multipliers”. This is when net profit, gross sales, or some other figure from the financial statements are multiplied that number by 3, 5, 7 times or whatever the case may necessitate. However, if using such simple methods such as multipliers it is important 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 in Maryland 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 Maryland 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 MD 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 Maryland pharmacy business owner, or pharmacy buyer was seeking.

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