What drives a pharmacy’s value and market price?

The federal government’s 60-day dispensing policy, introduced on 1 September, has impacted the market for pharmacy business sales. Pharmacy owners and managers alike need to consider how to adapt their business to the change if they are to maintain or improve its value and market price.

Several factors can influence the value and market price of a pharmacy business in Australia. Here are five key drivers.

Location and demographics

Location is a critical factor in determining the success and value of a pharmacy. A pharmacy in a densely populated area with a diverse demographic profile may have a higher market price and value than those in other areas. Consideration of factors such as proximity to medical facilities, retail traffic drivers, accessibility and local population demographics can significantly influence value.

Demographics can also influence demand for pharmacy services and products, as well as capacity to pay – or conversely, the reliance on government programs and support.

Location and local competitive market forces also often drive the opportunity for growth and business development (see ‘brand and reputation’ below).

Financial performance

The financial health and performance of a pharmacy represent a crucial driver of its market price in a pharmacy business sale. Prospective buyers typically assess factors such as sales, profit margins (gross and net), occupancy costs and cashflow. A pharmacy with a history of strong financial performance and steady growth is likely to command a higher market price.

Buyers also consider business and operating risks. Pharmacies with higher-risk revenue streams or complex services will be seen as less favourable prospects for purchase.

Market factors

Market factors such as demand, supply, and return on comparable investments all drive a pharmacy business sale.

  • Demand, often for particular types of pharmacy, is greater than supply and has been for some years. This excess demand ultimately drives competitive tension between buyers, and may result in premiums for some pharmacies.
  • Supply will vary across the years. Intergenerational changes as baby boomers exit ownership, as well as periods of greater challenges for business owners, will often increase supply. Periods with readily available and competent pharmacists and pharmacist managers will reduce supply as owners continue to hold onto their pharmacies.
  • Return on comparable investments, such as real estate, the share market and other asset classes, will also be a factor impacting the yields buyers and sellers expect in the pharmacy market.

 

Growth potential and diversification

Buyers often assess the growth potential of a pharmacy business. This includes the ability to expand services, introduce new income streams (offering vaccinations, health screenings, or compounding services, for example) and adapt to changing market trends. A pharmacy that can demonstrate growth prospects, perhaps in a population growth corridor, may command a higher market price.

Perversely, an underperforming pharmacy may be seen as an opportunity for new owners to improve the pharmacy’s performance and perhaps that of the pharmacy team.

 

Brand and reputation

A strong brand and a good reputation within the community can significantly impact the market price of a pharmacy. Pharmacies that have built trust and loyalty among their customers are likely to have a higher market value. Positive online reviews and word-of-mouth referrals can also contribute to a pharmacy’s reputation.

Ultimately, goodwill for a pharmacy is a function of its patients/customers’ trust in and loyalty to the pharmacy and its team. The transferability of the business is what the buyer is assuming and relying on in buying the pharmacy business.

 

Other influences

It’s important to note that market conditions, economic factors and industry trends can also influence the market price and value of a pharmacy business in Australia. Additionally, the specific circumstances of each pharmacy, such as its size, customer base and competition in the area, will play a role in determining its market price.

Consulting with business valuation experts or brokers that specialise in pharmacy sales can provide a more accurate assessment of a pharmacy’s value in the Australian market.

By Frank Sirianni.

 

This article first appeared in Retail Pharmacy November 

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