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How to Gauge the Value of Your Pharmacy

November 3, 2021

business-valuation

When doing business valuation in Vancouver, you need to understand a couple of concepts when determining the true worth of your pharmacy. There is fair market value, how much the pharmacy would sell under certain hypothetical conditions. Then, there is the strategic value which considers a buyer’s motivations, such as making the pharmacy acquisition to remove competition or to realize operational synergies. Fair market value is easier to determine, given that a “strategic value” must consider something of the unknown – the buyer’s intentions.

There are multiple ways owners have used in the past to “guess” the value of their pharmacy using rules of thumb. Hiring an expert for business valuation services is really only the sure way to determine it, however. Whether you’re in Vancouver or dealing with business valuation services in Edmonton, you should consider these factors before taking your store to market.

Using the Income Method

Before getting knee-deep into business valuation services, think of your pharmacy as an investment. With that investment, buyers will look to see if the potential value might increase over time, look at its capacity as a revenue generator and its liquidity. Most cash-flowing pharmacies will satisfy those conditions.

Calculating the value of any investment, you take the annual net profit (or cash flow it produces) and divide this amount by an appropriate risk rate. This is an income-based method of valuing a business. By using the income method, you “capitalize the earnings,” and the value derived from this method is a total value – which includes both goodwill and the tangible assets.

Alternatively, you can use a multiple of earnings using a precedent transaction method. This allows you to apply the income method using the market assessment of risk. Unfortunately, you need to have intel about the risk rate or have data on recent transactions for both methods.

In either circumstance, however, the process of doing a valuation forces you to understand what drives value in your pharmacy business. Furthermore, it uncovers what lost opportunities you can frame for your potential buyers.

How to Apply the Income Method

When engaging in valuation services and determining the true worth of your pharmacy business, understand that a business’ inherent value isn’t necessarily tied to its physical appearance. All things being considered, it shouldn’t look run down, but it is more its ability to produce cash than what it looks like. Additionally, your pharmacy’s intrinsic value isn’t necessarily tied to the money you have spent to ensure the business runs optimally.

What matters most when trying to establish your pharmacy’s actual value is yearly profit and how much risk is associated with maintaining cash flows after the sale. If you’re considering capital reinvestment, determine whether the reinvestment will result in additional profits or simply maintain the current profit markers. If neither is the case, then it doesn’t make sense to reinvest. By applying the income method, you’re able to assess risk factors and how profitable your business is, cutting out unnecessary spending and properly building value along the way.

These are the kind of tips you get when working with business valuation services in Edmonton or doing business valuation in Vancouver. Learn more about these services and contact us to find out more about what we do.

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