Pharmacy Daily | Risk vs Return on Investment vs Price

Would you pay a higher price for a house on a hill or one in a flood zone? Obviously, The one on the hill! The same applies with pharmacies. E.g. constant growth, good Gross Profit, long lease, reasonable rent, nearby doctors, little opposition, controlled staff levels. These things make a business more attractive and less risky. If any of these points are missing the risk increases and price decreases. Prices are worked out on “Return on Investment” basis and profitability is linked to the risk. A pharmacy with net profit of $200,000, capital city, good lease, minimal opposition, nearby doctors, “risk” is considered low. ROI of 16% is applied to $200,000 price is $1,250,000. However, if the risk was higher because there were no close doctors & high rent, a higher ROI would apply, say 19%; the same pharmacy making $200,000 would be priced at $1,052,632. Mathematically, as risk increases, percentage increases and price decreases. When selling or buying, think risks and benefits. This will determine how profit is related to price. “Greater the risk, lower the price” or “greater the benefits, higher the price”. If a pharmacy ticks all the right boxes, expect to pay a higher price for it, (The ROI will be percentage will be lower). This week’s contributor is Peter Raven, Executive Director of Raven’s Pharmacy Sales.

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