Determining the Price of Your Pharmacy

If I were to sell my Pharmacy, how much would I get? How do I determine the Pharmacy’s selling price? All similar questions with the same answer: you need a Pharmacy Valuation to determine the fair market value for your Pharmacy.  The fair market value is like the appraisal of a house or non-Pharmacy business.  An Independent Pharmacy Valuation gives you a very good idea of the Pharmacy’s value. The actual selling price is dependent on several other factors that will be covered later in this blog.

Reasons to Get a Pharmacy Valuation

Most Pharmacy owners think that they only need a valuation if they are selling their Pharmacy, but there are many reasons to have a Pharmacy valuation. The most common reasons for Pharmacy valuations are selling a Pharmacy or buying a Pharmacy.  Another popular reason for determining a Pharmacy’s fair market value is it can help to identify strengths and weaknesses of the Pharmacy business and allow the owner the opportunity to correct and improve problem areas. Therefore, ideally a Pharmacy valuation should be done 2-3 years prior to selling the Pharmacy business so adjustments can be made to increase net profits and increase the value of the Pharmacy. Other reasons are buying out a partner, retirement planning and estate planning.

The sale of a Pharmacy is more than just a dollar figure. It also involves emotions, a change in company owners, and the loss of seeing coworkers, friends, and patients on a daily basis. In most cases these may have been a large part of not only your professional life, but also your personal life. Maybe you opened the Pharmacy as a start-up, and it is your life’s work. Possibly it’s a legacy Pharmacy and has been in the family for decades.  The Pharmacy may have built your home, put your children through college, paid for weddings, provided memorable vacations and in most cases was your way of life for a long time. It isn’t just business to you…it’s personal.

It’s hard to determine the range of emotions a Pharmacy owner might experience during the sales process; therefore, our advice is to prepare the best you can for them because they will be there.

The selling of your Pharmacy will be one of the most important professional transactions you ever make and more times than not, it may happen only once in a lifetime. This also applies to the buyer. Due to the emotional attachment to the Pharmacy and other factors, a seller tends to value their Pharmacy much higher than a buyer will. A Pharmacy valuation is important for not only determining a fair market value, but it raises negotiations from a level of opinion to rational analysis for both the buyer and the seller and takes any emotions and sentimentality out of the equation.

Pharmacy Valuation Process

Valuing a Pharmacy is not an exact science. You obtain financial data and place these figures into tested formulas to determine a price range – low, average and high end, and then add an allowance for intangibles like a new housing development nearby, a large employer moving into the area or other items that will have a positive impact on sales.

The financial data required to complete the formulas are

  • 3-year profit and loss statements (income statements)
  • 3-year Balance Sheets
  • 3-year Tax Statements
  • Last documented Inventory Value (prescription and OTC)

Now that we have addressed the financials, before we move on to the formula discussion, let’s discuss a very important topic called EBITDA.

What is EBITDA?

Those of you selling or buying will hear this term often, especially as you engage with accountants and lending institutions.

EBITDA means Earnings Before Interest, Taxes, Depreciation and Amortization.

Today’s independent Pharmacy is different from 20, 10, and even 5 years ago. Today it is a varied marketplace. Most successful Pharmacies are providing a variety of services or a combination of services such as LTC, compounding, DME, Specialty Drugs, MTM, Immunizations, 340(b) and clinical services like point of care testing. Depending on the type and combination of services, a Pharmacy will have different Cost of Goods, Operating Expenses and Gross Profit for each.

For example, a retail Pharmacy with compounding services and having $3 million in gross sales will have a much different cost of goods, operating expenses, and gross profit than a Pharmacy just dispensing at the same gross sales. You would expect to see a higher gross profit % with higher labor costs. Conversely, a Pharmacy dispensing a fair amount of specialty drugs, would expect to see higher total sales but lower gross profits.

Therefore, any financial model that is focused on EBITDA most fairly values the Pharmacy business.

EBITDA Calculation

Take the net income from the Pharmacy’s Income Statement and add back the cost of Interest, Depreciation, Taxes and Amortization.

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

The next critical step is to normalize EBITDA.

Normalizing EBITDA

When determining the value of the Pharmacy it is essential to “normalize” or “add back” any non-business, personal, above market expenses and any other costs the new owner will not have.

Common examples of items that need to be normalized and added back are:

  1. Owners Salary
  2. Other Salaries
  3. Rent
  4. Personal Expenses

When normalizing, expenses that will not be carried forward by the Pharmacy buyer are “added back” to the net income for the purpose of determining the Pharmacy’s true value.

In a valuation Letter of Opinion, the written statement of EBITDA Normalization of our Example Pharmacy would look like this:

Total Sales$3,314,894
Unadjusted Net Profit (P & L)$345, 749 (10.4 %)

Add Backs:

Normalized add backs$104,148
Total Adjustment$136,511
Adjusted Net Profit$482,260 (14.5%)

The inventory for this Example Pharmacy is $190,000 and Furniture, Fixtures and Equipment (FFE) is $10,000.

Pay close attention to the adjusted net profit percentage, this is extremely important and will be discussed later.

Now that we have established the Pharmacy’s Adjusted Net Profit, which is the same as Normalized Net Profit or Normalized EBITDA, we are able to move on to formulas.

Pharmacy Valuation Formulas

Many owners assume there is a magical single, all-purpose formula that can be used to determine a Pharmacy’s fair market value; however, this is not the case. No single formula should be used to determine the value of a Pharmacy, below are examples of 12 formulas that have been used in valuations:

Percentage of SalesOwner’s Equity Approach
Return on InvestmentNet profit Approach
Summation of Relevant FactsOwner’s Cash Flow Intangible Method
Direct AssessmentItemization
Percentage of Sales plus InventoryDollar’s per Script
Asset ApproachDollar’s Per Script plus Inventory

Using a multiple formula approach represents a reliable way to determine a range of value from low to high.

The five formulas that we will be reviewing can be used as a starting point in determining the Pharmacy’s value. These provide an assessment of the value of the Pharmacy from several important perspectives: Profitability, Inventory, Sales, Total Income, Tangible Assets and Intangible Assets.

This gives a more rounded assessment of the Pharmacy’s value.

The Five Formulas Are:


Find the total yearly gross sales, which combines prescription, OTC, DME, MTM, immunization, etc. Then the rule of thumb in today’s competitive marketplace is 20-25% of total sales.

However, the actual percentage used is dependent on the adjusted net profit percentage calculated earlier by normalizing EBITDA and in some case may go higher than 25%.

Take total sales times the determined percentage of sales to get the Pharmacy Value.


This approach assumes a higher return on the investment than the stock market or other safer options and is usually around 20-30%. This type of return on investment is reasonable expectation for a small business with a risk like a community Pharmacy.

Divide the Adjusted Net Profit by the buyer’s desired return percentage to determine the value of the Pharmacy. This return percentage is adjusted up or down depending on the current profitability of the pharmacy and perceived risk.


This method was originally established by Bank of America and is a far more cumbersome calculation.

Direct Assessment is the Sum of Tangible Assets + Intangible Assets

Tangible Assets are items that can be directly valued or counted. In a Pharmacy valuation, this represents Inventory plus Furniture, Fixtures and Equipment (FFE).

FFE in most community pharmacies are generally fully depreciated thus is of minimal value. The amount can be higher if something new and significant is present such as an automated dispensing machine a medication adherence-packaging machine, significant compounding equipment, etc.

Intangible Assets are assets that are not physical in nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all examples of intangible assets.

Intangible Assets are calculated as Extra Earning Power times a Years of Profit Factor. Okay, so what does that mean?

Extra Earning Power Calculation

If you took the value of tangible assets (inventory + FFE) and invested the money in the stock market, instead of in a Pharmacy you would expect a reasonable return of 6-10%. Now, the buyer adds this figure to a benchmark salary of what they would be paid as a Pharmacist employee, let’s say $115,000 annually. The total of the return plus the benchmark salary is the total income for the pharmacist if they do not buy.

Take the Adjusted Net Profit plus the benchmark salary for a Pharmacist and subtract the total income for the pharmacist and this equals the Extra Earning Power

Years of Profit Factor

The years of profit factor is a number varying from 1-5 that indicates the approximate number of years it would take a newly opened Pharmacy to get to the financial position of the Pharmacy you are looking to buy. A value of one would be used for a Pharmacy that was not very profitable and a value of five would be used for a Pharmacy that is extremely profitable and stable. The Years of Profit Factor times Extra Earnings Power equals the Intangible Assets.

Lastly, to determine Direct Assessment Value add The Tangible Assets calculation to the Intangible Asset calculation.


Again, the percentage of sales used is proportional to the ANP%, please note, this percentage used will be lower than the percentage used in formula one, since we are adding inventory and FFE. The percentage can vary from 12% for a low ANP% to a few times that percentage for extremely profitable and stable operations.


Calculated as Adjusted Net Profit times a multiplier, usually 1-5, plus inventory and FFE. Once again, the multiplier used is dependent upon the ANP%.

Earlier in this blog, it was mentioned that there is no single all-purpose formula that can be used to determine a fair market value. A multiple formula approach represents a more reliable way to determine a price range.

Summary of Valuations

The five valuations may vary substantially from one another so, after all of the five formulas are calculated, throw out the high and low and average the remaining three. The average calculation would represent a Fair Market Value for the Pharmacy inclusive of goodwill, inventory, FFE, customer files and records.

We have now determined a base fair market value and price range for our example Pharmacy. Realize the final selling or purchase price is arrived through negotiations and is influenced by many subjective factors based on the buyer’s perspective and/or lending institutions preferences. Some of the other factors that may affect a Pharmacy’s selling price are:

  • Physical Appearance and Condition of the Pharmacy
  • Strength of Competition
  • Inventory Composition and Condition
  • Economic Trends in the Community
  • Third Party Contracts
  • How is the Pharmacy Trending
  • Lease Terms or Real Estate for Sale
  • Is the Pharmacy Reliant on a Few Physicians
  • Percentage of Controlled Drug Sales
  • Terms of the Sale
  • Number of Interested Buyers
  • Is the Buyer a Current Employee

Keeping accurate financials and careful normalization of the books can greatly enhance the value of your Pharmacy when the time comes to sell. Be sure to have detailed records for at least two years for the items you plan to normalize so it is easy to prove to a buyer. This should be in addition to other things you can do to increase profitability like inventory management and tighter controls on discretionary expenses. Normalizing properly can greatly enhance the value of your Pharmacy generating a much higher selling price as you start plugging your data into the valuation formulas.

If you are interested in learning about some common mistakes when valuing a Pharmacy check out our blog “What Not To Do When Valuing a Pharmacy”


What Not To Do When Valuing a Pharmacy


Why Choose PRS Pharmacy Services to Value Your Pharmacy

Your Pharmacy’s Value is more than just an arbitrary dollar amount per script and knowing your pharmacy’s true value is important no matter the reason. Your Pharmacy is the culmination of a lifetime of hard work and valuing or selling your pharmacy does not belong in the hands of amateurs. If you wish to discuss your options with professional Pharmacy brokerage and valuation experts, please reach out to the Pharmacy ownership specialists at PRS Pharmacy Services for a FREE Consultation.  If you decide to have us value and/or sell your Pharmacy, we will assign one of PRS’s licensed Pharmacists with at least 20 years of experience valuing, selling, transferring and opening retail Pharmacies to be your Project Manager.  The Pharmacist Project Manager, along with our skilled support staff, will work with you every step of the way to take the stress out of, what can be, a very stressful process if not managed properly. You can also sign up for a FREE PHARMACY VALUE ESTIMATE from our team of pharmacy valuation experts! 

PRS is a Different Kind of Broker…

PRS is the ONLY Pharmacy ownership and brokerage consultant recommended by NCPA, the Federation of Pharmacy Networks and over twenty Buying Groups representing more than 15,000 independent Pharmacies. Why? Our vast experience in the Independent Pharmacy industry coupled with our reputation make us the BRAND NAME in Pharmacy consulting, compliance, and brokerage.

Experience Matters…

To date, PRS has sold, transferred, or opened over 500 independent Pharmacies and has worked in all 50 states.  We are fully insured, licensed, and accredited. We invite you to compare us to our competition and see for yourself why we are a different kind of broker.

About the authors:

Harry Lattanzio is a registered Pharmacist, a Pharmacy Owner and President of PRS Pharmacy Services. He has been helping independent Pharmacies succeed for over thirty-five years.

He has spoken numerous times in front of top Pharmacy and medical professionals both in the US and overseas on the topic of American Pharmacy practice. He directed and oversaw the opening of PRS’s first overseas Pharmacy and has consulted on Pharmacy projects in Eastern Europe and Asia.

Mr. Lattanzio was the recipient of the first Pharmacy Times Next Generation Pharmacist Award for Industry Advocate of the Year created to honor the future of Pharmacy and the professionals who are defining it through their innovative professional practice.

Scott Weaver is a registered Pharmacist and an Accredited Business Intermediary and Pharmacy Regulatory Specialist.  His education and decades of experience working in and helping independent Pharmacies would be invaluable to any new or existing Pharmacy owner and a must have for any non-Pharmacist business owner looking to buy a Pharmacy.  He is the current VP of Pharmacy at PRS and conducts seminars for numerous trade organizations and groups every year. Including his talk on “How to Value a Pharmacy” and “Timelines and Protocols for Opening or Transferring a Pharmacy” at the NCPA Ownership Workshop held three times a year. Scott has personally assisted hundreds of Pharmacy owners over his 30+ years with PRS.