Using Multiples with Pharmacy Business Valuations in South Dakota

By Brad MacLiver
Authorship and profile at Google


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

South Dakota Pharmacy Business Valuations are part of the due diligence that will be conducted when there is a possible acquisition of the South Dakota pharmacy business, or SD pharmacy financing is needed. Pharmacy Business Valuations 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 South Dakota 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.

The population is aging and sales are increasing as the older generations are purchasing more prescriptions.  At the same time, government and insurance reimbursements are drastically being cut back, causing a major drop in nets profits for the pharmacy industry in SD. Reduced profits means it is more difficult for the business to service debt, which in turn means that it is harder for funding to be obtained.  When there is funding available, it will be in lower amounts. Somebody that is not a pharmacy specialist who used a gross sales multiplier would be very inaccurate in their calculation when compared to other pharmacy valuations. Any banker who sees valuations not within realistic industry comparisons is not going to fund the deal and any fees paid for the business valuation will have been wasted.

When you require a South Dakota pharmacy business valuation to be completed, it is highly recommended to pay more for a specialist who provides a banker realistic and current information. Don’t try to save a few bucks by cutting corners, which ends up wasting time, money, and possibly even ruin chances to obtain funding that either the SD pharmacy business owner, or pharmacy buyer was seeking.

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