Pharmacy goodwill Valuations
Valuing a pharmacy, as with any business, is fraught with considerable difficulty because there are many factors that can influence its value. The commonsense general rule is that there is a close relationship between risk and value such that the greater the risk the lower the value. What I find surprising with pharmacy valuations in recent years is that this general rule appears to have been turned on its head such that the values have stayed high as the risks have increased.
I would like to briefly discuss this with a view to adding what I believe is some much needed common sense to pharmacy values.
The industry standard currently used is based on a multiplier (usually between 5 and 6 using capitalisation rates of 16% to 20%) being applied to historical profits and this is regarded as the value of the pharmacy. The technical term used for this method is capitalisation of future maintainable profits, with the historical profits (usually an average over the last three years) being the most accurate basis for determining future profits. There are a number of adjustments to be made to the historical profits to reflect a true business position (such that the anomalies of ownership often seen in inappropriate wages and rents etc are excluded/included).
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