I am asked to value pharmacy goodwill for lots of different reasons. The usual scenarios include owners wanting to retire, owners dealing with health issues or owners looking to pursue other business interests. Pharmacists may also be exploring merger, partnership or growth opportunities and approach us with valuation requests.

Having a good understanding of your business's value provides important insights for decision-making. The big question for both pharmacy owners and potential buyers is how you can value pharmacy goodwill.

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Traditionally, pharmacy owners like to use pence in the pound based on pharmacy sales. For example, if the pharmacy has a turnover of £1 million and it was worth 95p in the pound, its value would be £950,000. So far this year, we have seen an average of 94p in the pound for sales completed across England. Unfortunately, this rule of thumb method fails to accurately account for numerous factors essential in assessing a pharmacy’s true value.

 

What really determines the value?

 

The value of goodwill primarily relies on a pharmacy’s profitability. To gauge this, the key figure to look at in the business accounts is earnings before interest, tax, depreciation and amortisation (EBITDA). Those acquiring pharmacies and their funders typically base their valuation on a multiple of the EBITDA. So far this year, we have seen an average EBITDA multiple of 10.5 being achieved in England.

 

What other factors can affect the value?

 

Certain parts of the UK experience higher demand for pharmacies, while others struggle to attract buyers. For example, pharmacies in areas such as Cornwall struggle to sell in our experience, as there is simply not a big demand for pharmacies there. Conversely, places like London and the home counties are more highly sought after. You can still successfully sell pharmacies in less popular areas, but price expectations should be adjusted accordingly.

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The closure or relocation of a doctor's surgery can affect the value of a pharmacy in that area and will limit the interest of potential buyers because of the risk factor. If your local doctor relocates nearer to other pharmacies, buyers may be deterred due to the potential loss of business, or vice versa if the relocation is in the buyer’s favour.

Staff costs are one of the biggest factors affecting valuations I am seeing at the moment. Staff wages impact the net profits of a business, so the higher the cost, the lower the profit. There has been a steep rise in pharmacists’ rates recently, which, coupled with minimum wage increases, has had an impact on bottom line profits.

High rents or unreasonable terms in a lease or leases that are not renewable are issues that will affect the value of a pharmacy as well. Buyers need security of tenure favouring leases with at least 15 years left on them and an option to renew. It is important to ensure lease arrangements are in order before listing a pharmacy for sale.

Are your premises big enough for the business? Some pharmacies with large turnovers operate from very small premises, limiting the future potential of the business to grow. Sometimes there may not even be space for a proper consultation room. This will affect the value of the pharmacy because a new owner will want a business with potential.

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If the pharmacy is high-risk, labour intensive, or has a high volume of over-the-counter (OTC) transactions, its value will also be reduced. High OTC volumes usually apply to pharmacies in city centres. These days, most pharmacies’ counter trade is less than 10%. So if, say, there is 40% or 50% counter trade, that can negatively affect the value.

Buyers are not keen on paying for counter trade, which may not be sustainable. Banks also tend to look closely and tighten their lending criteria for pharmacies with higher counter trade, so this has a negative effect on offers from buyers.

As a general guide, if more than 10% of your items are from care or nursing homes, this needs to be taken into account in the valuation. When I speak to pharmacy owners who have recently bought pharmacies dealing with homes and I ask how it is going, I often get the response, “You know, we lost the homes not long after we took over the business.” And, of course, homes are labour intensive, as are monitored dosage systems (MDSs), which will also introduce extra delivery costs.

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If you are buying a business, you want one with the potential to be developed and grow. Consequently, pharmacies offering room for development and expansion are more popular with buyers and more likely to command a premium value because they generate competitive offers from prospective buyers.

 

Do your homework

 

A thorough market analysis involves comparing the pharmacy being valued with similar businesses recently sold in the area. Factors like turnover, EBITDA, achieved multiple of EBITDA, pence in the pound, and sold prices are carefully reviewed. Additionally, demand in the area and the quality of potential buyers are considered. A comprehensive evaluation of these factors offers a fairly accurate insight into the expected value of the pharmacy being appraised.

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Valuing a pharmacy involves a combination of pharmacy-specific factors, financial analysis and assessment of the market. You may feel uncertain about whether to explore potential growth avenues now or leave them untapped to increase your pharmacy’s desirability. An experienced pharmacy broker will guide you through the process and help advise you on your options.

 

Anne Hutchings is managing director of Hutchings Consultants Ltd – pharmacy sales and valuations