Pharmacy acquisition Formula

[tammoraf81]

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What is the most common formula used to determine fair price on on a pharmacy for sale ?? Any ideas ?

 

[cwilley]

Easier to show an example:

Your recast balance sheet shows a net current asset value of $80,000, and a net long-term asset value of $200,000. So, the minimum or base price for your business should be $280,000 — the market value of your assets.

Now let's assume that your historical annual earnings figure is $150,000. How much of this earnings figure is attributable to the assets? You might calculate that under current market conditions the return on current assets should be $80,000 x 7.5% or $6,000, and your return on long-term assets should be $200,000 x 9.4% or $18,800.

Thus, your total earnings attributable to your assets is $6,000 + $18,800 or $24,800. Subtracting this "asset return" figure from your total earnings, you arrive at an excess earnings amount of $125,200 ($150,000 - $24,800 = $125,200).

Using a cap. rate of 20 percent, the value of your excess earnings is $626,000. Add to this the current market value of your assets, and you arrive at a total price of $906,000 for the business ($626,000 + $280,000 = $906,000).

 

[Old Timer]

Easier to show an example:

Your recast balance sheet shows a net current asset value of $80,000, and a net long-term asset value of $200,000. So, the minimum or base price for your business should be $280,000 — the market value of your assets.

Now let's assume that your historical annual earnings figure is $150,000. How much of this earnings figure is attributable to the assets? You might calculate that under current market conditions the return on current assets should be $80,000 x 7.5% or $6,000, and your return on long-term assets should be $200,000 x 9.4% or $18,800.

Thus, your total earnings attributable to your assets is $6,000 + $18,800 or $24,800. Subtracting this "asset return" figure from your total earnings, you arrive at an excess earnings amount of $125,200 ($150,000 - $24,800 = $125,200).

Using a cap. rate of 20 percent, the value of your excess earnings is $626,000. Add to this the current market value of your assets, and you arrive at a total price of $906,000 for the business ($626,000 + $280,000 = $906,000).

Really. In 30 years I have never ever seen anything that is so far from reality as this.....

 

[tammoraf81]

Wow. I was hoping for an equation or anything has to do with sales and gross profit.
Complicated !!!!

 

[Old Timer]

Wow. I was hoping for an equation or anything has to do with sales and gross profit.
Complicated !!!!

There is no such equation. You need to look at a number of factors:

Location: Is it in a good location? Are there any major construction projects that might disrupt the business? A little restaurant opened near my house while back. The nearby railroad bridge was replaced and it's coming up on 2 years. The restaurant is suffering because people who used to have a 5 minuted drive now have a 20 minuted drive. Is the lease transferable or will the landlord come in and increase your rent by 200%?

Diversification: Is the business tied to a contract with a nursing home or assisted living facility that is not guaranteed to continue? Is it near a senior center that is closing up? Are the demographics of the neighborhood changing? What is the population density?

Business Trends: How is the business trending over the last 3-5 years. Are sales growing or shrinking? How much profit is being made each year?

Inventory: What is the inventory like. Is it all saleable? Is it moving?

Intangibles: How much money is not being reported to the feds? What expenses is he running through the business? Can you cut any to make the business more profitable?

Financing: Is the owner willing to take back the note? At what terms?

How do you see any of these fitting into an equation?

 

[MountainPharmD]

There are no hard and fast rules for determining the price of a pharmacy. Bottomline is the seller values it to high and the buyer values it too low and somewhere in the middle is the price.

Dr. Richard Jackson of Mercer University has the best information out there regarding financial analysis in pharmacy aquisitions. He speaks at the NCPA ownership academy. His talk alone is worth the money.

http://www.ncpanet.org/pdf/students/Valuation-and-Junior-Ptnrshp-NCPA-Students-2011.pdf

 

[tammoraf81]

There are no hard and fast rules for determining the price of a pharmacy. Bottomline is the seller values it to high and the buyer values it too low and somewhere in the middle is the price.

Dr. Richard Jackson of Mercer University has the best information out there regarding financial analysis in pharmacy aquisitions. He speaks at the NCPA ownership academy. His talk alone is worth the money.

http://www.ncpanet.org/pdf/students/Valuation-and-Junior-Ptnrshp-NCPA-Students-2011.pdf

I know. There is that formula "net profit approach" says
1.5×(net profit +owner salary)+ inventory
One pharmacy owner wants to use the same formula but with a multiplier of 3 instead of 1.5 which I think is way too much .

 

[Momus]

I know. There is that formula "net profit approach" says
1.5×(net profit +owner salary)+ inventory
One pharmacy owner wants to use the same formula but with a multiplier of 3 instead of 1.5 which I think is way too much .

You will be lucky if you can find good stocks at P/E + P/B of 3 LOL.