Using Multiples in Iowa Pharmacy Business Valuations

By Brad MacLiver
Authorship and profile at Google


People who have purchased a residence are familiar with real estate appraisals. With an IA pharmacy business there are times when both the real estate and the business itself needs to be appraised. The pharmacy business appraisal does not include the real estate and is more commonly called a Pharmacy Business Valuation.

Iowa Pharmacy Business Valuations are part of the due diligence that will be conducted when there is a possible acquisition of the pharmacy business, or pharmacy financing is needed. Pharmacy Business Valuations in Iowa place a reasonable market value on the drug store after consideration has been given to factors such as, but not limited to: assets, financial statements, tax returns, goodwill, customer lists, licensing, competitive advantages, regulatory concerns, management team, inventories, and industry comparisons.

There are a number of accepted methods for valuing a retail drug store business. Each method has its own perspective and the business owner should have a reasonable understanding of the method being used.

One simple method is to use “multipliers” This is when someone takes the net profit, gross sales, or some other figure from the financial statements and then multiplies that number by 3, 5, 8 times (whatever the case may be). However, when using simple methods such as multipliers you need to understand a few points:

1. Financial statements are typically prepared to justify the lowest possible taxes.

2. The stated profits are typically not the actual cash flow of the company.

3. Due to tax reasons, the company's assets will probably have a different value than what is on the books.

Taking the points above into account, it is clear that a simple Iowa pharmacy valuation using multipliers may not reflect the true market value of the drug store.  So, when financing is a necessity, simple multiplier methods are not acceptable. Banks and finance companies require third party, unbiased pharmacy valuations that are completed using advanced calculations, industry knowledge, and sound financial reasoning.

Companies that specializes in specific industries are able to provide more precise and credible valuations.  Specialists should have more industry data than a company that does not normally value businesses in that industry.  The end result of not consulting a professional who has the proper industry data will be a more ambiguous valuation.

Due to the nation's aging population, pharmacy sales are on the rise as the older generations are purchasing more prescriptions.  At the same time, however, government and insurance reimbursements have been drastically cut.  This has caused a major decline in the nets profits for the pharmacy industry. Lower profits means it is harder for the business to service debt. That in turn means it is harder to obtain funding, and when there is funding it will be in lower amounts. Someone who is not a pharmacy specialist in Iowa and used a gross sales multiplier would be way off in their calculation compared to other IA pharmacy valuations. A banker that sees valuations that are not within realistic industry comparisons is not going to fund the deal and fees paid for the business valuation will have been wasted.

When it is necessary to have a pharmacy business valuation completed, it is strongly advised to pay more for a specialist that can provide a banker realistic and current information. Don’t try and save a few bucks by cutting corners, and then end up wasting time, money, and possibly even ruin a chance of obtaining funding that either the pharmacy business owner, or pharmacy buyer was seeking.

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