The Entrepreneurial Pharmacy Podcast: What’s Your Pharmacy Worth

One of the most common questions we get from pharmacy owners looking to buy or sell a pharmacy is “what’s the pharmacy worth?”  

In this episode of The Entrepreneurial Pharmacy Podcast, Ollin Sykes, CPA, CITP, CMA and Scotty Sykes, CPA, CFP discuss assessing the worth of your pharmacy, maximizing the value of your pharmacy, maximizing cash flow, and more!  

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More Resources on this Topic:

Podcast – Preparing to Sell Your Pharmacy 

Blog – Do These 2 Things Before Selling Your Pharmacy 

Service – Buying and Selling Advisory 

Service – Rx Assessment 

If you prefer to read this content, the video transcript is below:

Scotty Sykes: Okay, so welcome everybody to another episode here. We’re going to talk about you’re a pharmacy owner out there. You’re wondering just whether you’re selling your pharmacy or buying a pharmacy. So, what’s the pharmacy worth? 

Ollin Sykes: That’s always a valid question to ask from a, especially if I’m a seller. I want to maximize that value and I want that value to be shown over a period of time, 2, 3, 4 years out, I want to be building that value of the pharmacy prior to making the decision to make that sale, whether it’s either an asset sale or a common stock sale. First and foremost, we want to try to maximize the cash flow and we’re maximizing that cash flow, that is commonly referred to is your earnings before interest taxes, depreciation and amortization. That number is typically recasted for personal items that you may have in the pharmacy so that a potential buyer can come in and take that positive cash flow and or adjusted EBITDA, put some multiplier on that to determine the value of the goodwill and then add to that the value of other assets potentially that you’re selling. Again, if you’re selling assets, you may be selling inventory, receivables, furniture, fixtures, equipment, you may have some technology, you may have a land and building, but all those assets in an asset purchase would be added to the value of the goodwill of the script files. And in making that EBITDA determination, we typically look at three or four years of historical numbers. We sometimes will weight those numbers more to the current year than the past 3rd or 4th year we go through some calculations to determine what is a fair way of looking at the value of that cash flow, and then add that to our asking chart of assets that are being offered for sale. So, it all starts with the fundamental accounting numbers first and foremost. You want to show as long a history as you can and the trends. You want the trends to be very positive in terms of the types of revenue that you’ve had. The script growth that you’ve had, obviously, you’re going to need to make COVID adjustments. So COVID changed pharmacies for about 18 months, two years, and I, as a buyer, don’t want to pay for those COVID adjustments, and all that has to be reflected in. But you’ve got to find somebody who is dealing with this on an ongoing and continuous basis, and not just taking that tax return, and not just taking that financial statement that’s been issued and just using that to make a determination. Often, many of the wholesalers will take what’s only offered to them, which is tax returns and financial statements, and perform certain valuation metrics that they have formulas to deal with. And there are no less than 15 or 20 different ways to determine values for pharmacies. However, there are typically three or four ways that are more common than others. And we’ve just spoken about them, uh, in this, this video. So, it’s a very important process to work with professionals that know what they’re doing in this particular arena. You know, making sure your fundamental numbers are in place, making sure you’re starting way ahead of time, and not just coming to the end of a calendar year saying, okay, I want to sell, and then you haven’t prepared for it for the last 2, years. So, it’s a preparation process that has to take place in a strategy, which includes making sure that the physical aspects of your pharmacy are in order as well.   

Scotty Sykes: So, a multiple cash flow is a common way. What about a pharmacy that has made some blunders. They’re not profitable. There’s no multiple of cash flow. What options are they looking at in terms of? 

Ollin Sykes: Yeah, sometimes we’ll see a situation like that exists where there’s not positive cash flow or there are very large adjustments there and sometimes you have to hone in to some of the alternative ways of doing evaluation, including valuation of script files and evaluations of other assets. But typically, if you’re a seller, that’s going to work against you if you don’t have positive cash flow or a situation I’m working with now, the payroll that the pharmacy has, they’re trying to sell a pharmacy is way out of line and it’s hurting those cash flow determinations, and potential buyers are looking at that, even though you may make the argument that they can eliminate payroll, potential buyers are saying, well, you’ve been running this excess payroll for a number of years and if we come in and make changes, even though you have a sizable pharmacy, the whole character of the pharmacy could change and it may not be worth what you believed it is. So, you got to be very careful that your key performance metrics are in line for the years coming up to the point time of selling. 

Scotty Sykes: Absolutely. And valuations can be like you said, there’s multiple ways to value a pharmacy. It’s 15, 20 you’ll see thrown out there from time to time. 

Ollin Sykes: Yes.  

Scotty Sykes: And knowing what the banks are going to, how they’re going to value a pharmacy can be very insightful in terms of how you’re going to look at valuing your pharmacy. I don’t know. I’m just rambling on at this point.  

Ollin Sykes: Yes.  

Scotty Sykes: Anything else you want to talk about?   

Ollin Sykes: Nope. That kind of does it.  

Scotty Sykes: All right. All right. Well, thanks for listening in. And we will circle back with more episodes.