The Myth Of “Turnover” Means Selling Price
December 16, 2013
It’s interesting to note that
there is the misconception that if
a pharmacy’s turnover is, say, $3
million, then that is the value of
the business.
Dismiss that thought
immediately. Let’s look at it from
a lender’s perspective. How do
they look at valuing a business?
Part of the valuation process is
the very important profitability
of the business and what the
“Return on Investment” (ROI) will
be. It’s quite simple really. Let’s
use an ROI at what appears to
be the average today for metro
pharmacies – 17%. Keep in mind
this is only part of the valuation
process. Many other things come
into play. Say, the pharmacy
is turning over $2,000,000 and
after addbacks/adjustments;
the business nets $300,000 per
annum. Based on a 17% ROI you
would arrive at a ballpark figure
of $1.76 million or thereabouts.
Ok, what if the business
turns over $3,000,000 and
nets $300,000? Same answer -
$1.76m.
Now here’s a curly one. What
if the business turnover is
$3,000,000 and profit $700,000?
Aha, different ballgame. Based
on a 17% ROI we’re now looking
at $4.12m. Problem? Yes. Try
convincing a buyer!!
As mentioned, there are many
other criteria lenders take into
consideration when valuing a
pharmacy. This just gives you a
little insight into how it works.
This week’s
contributor is
Greg Aspeling,
Sales Manager
of Raven’s Pharmacy Sales.
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