Maximising your business’s value (Pharmacy Today – September 2011)

Over the last two months, Markhams’ column has discussed the types of valuation methodologies used in pharmacy and some techniques for reading and interpreting the financial statements of your business. This month we will look at some trends we have seen over the past year including trends in the valuation of pharmacy businesses, and we will look at how the value of your pharmacy business can be improved when you sell the business in the future.

Trends Markhams has seen over the past year

Most pharmacies we see have managed to maintain their turnover levels when compared with the 2010 financial year. This is usually due to an increase in script numbers, as drug prices seem to have continued their decline this year. The result of the increase in script numbers and the decrease in drug prices is usually a slightly higher gross profit from similar turnover, meaning a slightly higher gross percentage has been achieved by many pharmacies.

Prior year trends of new pharmacies opening have contributed with 36 new pharmacy licences being issued in the Auckland area over the last 18 months. Many of the new pharmacies are being opened by existing pharmacy owners.

Government initiatives have combined with market pressures are we are seeing more large integrated family healthcare centres being constructed or in the planning phase. Funding for new pharmacy acquisitions has remained difficult.

Valuation methodology and multiples

In our July article, Christchurch office Director Paul Rickerby mentioned there was a range of valuation methods available for pharmacies, but the capitalisation of earnings method is the most used. Currently, we are seeing pharmacies sold with valuation multiples between four and five times the future maintainable EBIT (earnings before interest and tax).

Exceptional pharmacies may sell slightly above this range, while pharmacies with issues with the lease or other problems may sell for less. Often there is some discussion around the calculation of future maintainable EBIT, as this number is critical in the calculation.

How to maximise the sale value of your pharmacy

Keeping in mind pharmacy valuation is often completed on an EBIT multiple basis, the best way to improve the value of the pharmacy is to improve the profit of the pharmacy.

Broadly, there are two ways of doing this: first improve the business decisions you make. This means running the leanest, most efficient pharmacy business possible, while maximising the value of the sales in the pharmacy. Ways that you can do this include buying as well as possible with the lowest amount of associated costs (for example, bank or credit card charges), and using the least wages and locum costs possible.

Use of space in the pharmacy is important – is it possible to sublease a portion of the pharmacy to reduce the occupancy costs of the pharmacy?

Retail experts should be used to assist with the layout of the store and to maximise the value of your shop sales. You should look to gain the maximum sales price for your shop items while remaining competitive with other shops in your area. And, second, consider the accounting implications of transactions.

Some business decisions will have options as to how the transaction is completed.

One example is the hiring of an asset compared with buying the asset – depending on the depreciation rate of the asset and how long the asset will be kept for, EBIT may be improved by buying the asset instead of leasing.

Also, business owners will often enter into transactions on the basis a tax benefit can be obtained in recording the transaction in a certain way. Besides making life difficult for you with the IRD in the event of an audit, recording transactions with questionable benefit to the business in the accounts also has the effect of reducing the EBIT of the business. In these situations business vendors will often produce a special purpose income statement that has adjustments made for discretionary expenses. A special purpose report can be helpful when discussing the EBIT figure to use in the valuation but does not have as much credibility as a full set of accounts.

The other part of the value equation is the multiple used. This can be made as high as possible by having a good quality lease, and contracts where services are provided, for example, to resthomes.

Doing this will give buyers confidence in the earnings that your pharmacy shows can be maintained in the future.

When thinking about value, remember the golden rule, every dollar of extra profit your pharmacy earns will add at least four dollars to the value of your business.

Published by Andrew Millington, Markhams Auckland in Pharmacy Today September 2011

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