Finding the value of a pharmacy is not like appraising any other business. Pharmacy businesses are unique as are the processes and formulas by which they are appraised. Only experienced pharmacy valuation professionals should be determining what your life’s work is worth, but how do you know who to trust. Making matters even more confusing is that most of the information out there discusses “how to value a pharmacy” but very few, if any, advise you on “what not to do when valuing a pharmacy”. In this article we are going to cover some common sources a pharmacy owner might utilize when getting a pharmacy valuation and why you should ignore them and look elsewhere.
The current climate in Independent Pharmacy with DIR fees, low reimbursements and now COVID-19 has caused an increase in Pharmacy owners wanting to sell their stores. This influx of potential sellers has created a market for inexperienced and unscrupulous opportunists in the Pharmacy Brokerage and Valuations space.
There are obvious things to watch out for when talking to a potential Pharmacy Broker or Pharmacy Valuation Company. Some things are more obvious than others like a company that has always specialized in one thing and now suddenly (within the last 6 months) claims they are Pharmacy Valuation and Brokerage experts…this is a big red flag and you should only hire experienced professionals, but there are other things that are a little less obvious as well. Things like, have they ever worked in or owned a pharmacy? Are they a registered pharmacist? How long have they been appraising pharmacies? How many pharmacy appraisals have they done and can they provide verifiable testimonials? Do the banks accept their valuations?
In addition to these, some companies use outdated methods and other tactics that you might not realize are outdated until it is too late.
The adage “Buyer Beware” is never truer than when it comes to those companies offering to value your pharmacy. Here are four of the more common things to avoid when hiring a Pharmacy Valuation/Brokerage company and what to do if you encounter them:
- If someone offers you a “free” valuation, run the other way. These so-called experts think by using a few formulas they can accurately determine the value of your pharmacy and life’s work. They fail to take into account all of those important items that cannot be found in the formulas, such as normalization of income, customer loyalty, location, reputation in the community, competition and many more. Formulas are important but just a part of the overall picture and the factoring used by professionals varies based on the information just mentioned. The “free” pharmacy valuation could actually cost you tens of thousands on the sale price or end up costing you the sale.
- A valuation from a chain is, well, from a chain. It is in their best interest to undervalue your store and convince you that no one else will want to buy it because that is their ultimate goal. Alternatively, they will entice with higher values then cut that with how the sales agreement is written. Here is how they work it. You very rarely will be paid in full up front. They retain part of the selling price and whether you get any of it may depend on how many of your customers they keep. If your customers do not like their service and leave, it will cost you. Don’t let a chain value your pharmacy…just don’t do it unless you like losing money. For more information on why selling to a chain is a bad idea see our blog “Selling to a Chain is the Easy Road to Big Bucks, Right? Not so Fast!”
- Do not let your wholesaler do the pharmacy valuation. We know they offer this as a “service”, but wholesalers have one primary goal, keeping the wholesale business, period. If that means selling your pharmacy at the low end of market value, so be it. The wholesaler valuations we have reviewed are always too low and prepared with as little effort as possible. They will plug your numbers into a couple formulas and they’re done. That is certainly not the way to conduct a proper pharmacy valuation/appraisal. Perhaps even more important, wholesalers typically only present to the seller potential buyers that currently have an account with that particular wholesaler or have agreed to open one, thus eliminating about 75% of the potential buyers. If your goal is to sell your pharmacy for what it is actually worth quickly and keep it independent, hire an independent pharmacy broker to handle your valuation and listing…in most cases they will work with your wholesaler to keep everything the same and ensure a smooth transition for the new owners anyway.
- The too good to be true offers…”Wow, my pharmacy is worth that much!” The old adage “if it sounds too good to be true, then it is” is never truer than in this situation. Many “brokers” will come in with a high valuation to entice you to sign with them. They know the pharmacy is not worth the amount they valued it at, but after you sign with them they will eventually bring you excuses and offers lower than the value they told you hoping you will take one. Any competent broker knows that financing is the key to any deal and a reputable lending institution is not going to lend more than what a real pharmacy valuation justifies. Save yourself the headache and stress of this type of process and make certain you are working with an experienced company that knows how to find the fair market value of your pharmacy.
None of the above companies or methods take the time to dig into the numbers and normalize the pharmacy’s income, which means adding expenses the new owners will not have back into net profits. Some examples of items you would add back in would be the pharmacy delivery boat on the books, excessive rent payments (you own the building) or a very high salary for the owner or family members. Every $10,000 added back to net profit adds $30,000 – $50,000 to the selling price. A recent pharmacy valuation we completed had over $300,000 in add backs that increased the selling price by $1.2 million. For more information on normalizing the income of a pharmacy, check out our blog “Pharmacy Appraisal Normalization: A Critical Step in Finding the Real Value of a Pharmacy”.
The bottom line is that you want a carefully prepared, detailed and justifiable pharmacy valuation that will be readily accepted by a lending institution and potential buyers. Ideally, choose a pharmacy broker that utilizes an independent third party to assist with the pharmacy valuation so it is totally unbiased.
When it comes to valuing your pharmacy, paying for a professional pharmacy valuation that is done right is well worth the minimal cost, which is typically less than $2,000. After all, you are selling your life’s work so making certain that you are not undervaluing what you worked so hard to build is worth paying for. It will be a good investment for your future.
If you have already paid a company to do a pharmacy valuation and you are uncertain about the results or just want a second opinion, feel free to reach out to the pharmacy valuation experts at PRS. We can do an evaluation of your appraisal and advise you on whether it is good or needs to be adjusted. Having the valuation team at PRS provide a second look at your Pharmacy Valuation can save you from making a mistake that can have lasting effects and cost you thousands of dollars.
If you haven’t had a pharmacy valuation done yet consider calling PRS. Our team would love to work with you!
Selling your pharmacy is the culmination of a lifetime of hard work and does not belong in the hands of amateurs. If you wish to discuss your options with true professional pharmacy brokerage and valuation experts, please reach out to the pharmacy brokerage specialists at PRS Pharmacy Services. If you decide to have us value or sell your pharmacy, we will assign one of PRS’s licensed Pharmacists with at least 20 years of experience valuing, selling 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!
PRS is the ONLY pharmacy brokerage consultant endorsed by NCPA, the Federation of Pharmacy Networks and over twenty Buying Groups representing more than 15,000 independent pharmacies. Why? Unlike some companies that claim to be experts, we actually are, and our vast experience in a variety of unique situations make us the BRAND NAME in pharmacy consulting, compliance and brokerage. 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.
About the Authors:
Harry Lattanzio is a registered Pharmacist, Pharmacy Owner and President of PRS Pharmacy Services and 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.
Harry 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. 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” at NCPA Ownership Workshop held three times a year. Scott has successfully assisted hundreds of pharmacy owners over his 30+ years with PRS.