Richard A. Jackson, Ph.D.


Today's business community is characterized by mergers and acquisitions. The pharmacy marketplace is
no exception. Pharmaceutical companies are buying other pharmaceutical companies, retail pharmacy chains are buying other chains and independent community pharmacies. Independent pharmacy owners are being approached nationwide by chains interested in buying out their independent pharmacy. The proliferation of managed care, decreasing profit margins and the uncertainty of the future have caused many independent owners consider selling their pharmacies. Because many pharmacy chains are making- offers to purchase independent pharmacies, it is very important that owner to be able to determine what the pharmacy is worth. This will assist the owner in making the appropriate decision to sell or to assure that a fair price is paid for the pharmacy should the owner decide to sell.

The determination of an equitable selling price for a community pharmacy is difficult for most pharmacy owners. For many, it is a once in a lifetime experience for which they have received little or no formal education or training. Moreover, the pharmacy owner may be placed in the situation of negotiating with representatives from a chain pharmacy whose primary function is negotiating the purchase of pharmacies an activity which they may do several times a week. Therefore, because of a lack of experience, the pharmacy owner may find himself in a difficult situation and at a disadvantage. It, therefore, behooves the pharmacy owner to be as knowledgeable as possible regarding the factors associated with the determination of an equitable selling price.

Further exacerbating the situation is the fact that many pharmacy owners tend to set an unrealistically high selling price for their pharmacy. This comes about because most owners let emotion play too much of a role in selling price determination. This is somewhat understandable when one considers that for many owners the pharmacy is not unlike a member of the family. It was "created" by the owner and has been a part of the owner's life for decades.

Another confounding factor is associated with fact that many business owners tend to sell their business at the wrong time. Few businesses are offered for sale at a time when the business is profitable and economic trends are optimistic. Most decisions to sell occur when the profit margins of the business are poor or decreasing and future economic projections are less than favorable. Consequently, many businesses, including pharmacies, are sold for less than optimal prices.


This fiscal condition of the business is an important consideration in the determination of an equitable selling price. Although there are formulas, which will be discussed later, which can provide one with a good indication of the selling price for an "average" pharmacy, the value must be adjusted up or down depending on the financial condition of the business. The situation is similar to the determination of the value of a used car. We are all familiar with the use of the "blue book" value for used automobiles. This book contains values for the "average" used car. However, the value listed in the "blue book" would be adjusted up or down depending on the physical condition of the auto. Included in this determination would be such things as the condition of the interior and exterior, mileage, condition of the motor, etc. In a similar manner, the- fiscal condition of a business would affect its selling price, therefore, a complete financial analysis should always be performed in conjunction with formulas to determine an equitable selling price.

In addition to providing financial information related to the valuation of the pharmacy, a favorable financial analysis will assist the seller in the negotiation process. By pointing out those aspect of the business, such as profitability, solvency, efficiency, etc., the seller may be able to negotiate a better selling price. To be certain, an astute purchaser would be quick to point out negative financial statistics in an attempt to negotiate a lower purchase price.


In addition to the financial analysis, there are several subjective factors which would affect the value of a business. An assessment of each of the following would be important in adjusting the valuation of a pharmacy as determined by various formulas described later in this monograph. Important factors include:

1.       Physical Appearance and Condition of the Pharmacy (Are certain fixed assets in need of repair or replacement?)
2.       Cash Flow (Examine past cash flow and make future projections)
3.       Competition (How aggressive are pharmacy and other non-drug outlets and is expansion planned?)
4.      Inventory Composition and Condition (Does inventory reflect needs and demands of physicians and customers and is it saleable or shopworn?)
5.       Economic Trends in the Community (Is the community stable with high employment?)
6.       Future Projections for Retail Pharmacy (Are other pharmacies stable?)
7.       Manage Care (What percentage of prescriptions are third party and what is the outlook for the future?)
8.       Lease Terms
9.       Location
10.     Image of the Pharmacy in the Community
11.     Terms of Sale

Valuation Formulas

The value of a business is usually determined through a process of negotiation between the buyer and the seller. It goes without saying that the eventual selling price will He somewhere between the initial price asked by the seller (usually too high) and the price the purchaser is willing to initially pay (usually too low). The valuation of a business is not an exact science. It is based on the assessment of facts about the business, informed judgement and some aspects of common sense. In the final analysis, the valuation is subjective, however, several formulas have been developed to estimate the equitable selling price of a business. The valuations derived from these formulas may then be adjusted according to the financial analysis and those subjective factors described above to arrive at a valuation that is equitable.

There is no single formula that is best for all pharmacies. Many formulas should be used, providing for a range of valuations. Each formula provides for an assessment of the valuation of the business from several perspectives, e.g., profitability, net worth, sales, etc. The use of the formulas provides for a range of values that serves as a valid indication of the value of the pharmacy Based upon the financial analysis and other factors described above, one may more precisely assess the value of the pharmacy. To illustrate the use of these formulas, a pharmacy with approximately $1,300,000 in annual sales will be used. The income statement and balance sheet for this example pharmacy appear in Figures I and 2. The example pharmacy filled 34,331 prescriptions annually.

Inasmuch as space is limited, a complete financial analysis is not provided in this monograph. The financial analysis of this pharmacy reveals the pharmacy to be approximately "average", thereby not necessitating any significant adjustment in the values provided by the formulas.

It should be pointed out that some adjustments may need to be made in the data provided on the financial statements before being utilized in the valuation formulas. For example, some of the formulas use net profit in their calculation. In some situations, an owner may be taking an unusually large salary, thereby resulting in an inordinately small net profit. In this case the owner's salary would need to be adjusted to a more "realistic" figure and the net profit adjusted upward for use in the valuation formulas. Other adjustments from "book values" to more realistic figures may be necessary.

In addition, since depreciation is not an "out of pocket" expense, it is usually added to the net profit in those formulas wherein net profit is used in calculation of the selling price.

The following valuations using formulas do not include accounts receivable or accounts or notes payable.  The accounts receivable may be negotiated separately by the buyer and seller. The accounts and notes payable would be handled by the seller.

1. Sales Projection Method

One valuation method that relates to a simple percentage of sales should be mentioned since it has used for many years to estimate the value of a pharmacy. The traditional formula of one-third of annual sales is no longer applicable due to shrinking profit margins and would result in an overstating of the value of the pharmacy. A more appropriate "rule of thumb" in today's competitive community pharmacy marketplace would be closer to 25%-28% of sales. Using 26.5% this gives us a value of $349,914.

2. Return (Net Profit) on Investment (Purchase Price)

Another method uses the return on investment as an indicator of the value of the pharmacy. The "return" is the net profit per year and the "investment" is the selling price of the pharmacy. If a return on investment of 20% were desired, the selling price would be (.20) (selling price) = Net Profit or $61,137. Therefore, the selling price = $305,685.

3. Summation of Relevant Factors

A third method of valuation involves selection of "relevant factors" from the balance sheet. These factors include assets, liabilities and net worth as well as "goodwill" to assess the purchase price. Before using these figures in the valuation calculation, it may be necessary to adjust them. The value of the inventory on the balance sheet may not be an accurate figure. The inventory may contain unsalable items or outdated items that have not been removed from stock. It is best to have an outside inventory service do a complete inventory, the cost of which should be shared by the buyer and the seller. The value of fixtures and equipment should be determined by a disinterested third party such as an individual who sells fixtures and equipment who could give an accurate appraisal of how much new fixtures of similar condition would cost.

The fourth component in the summation of relevant factors is "goodwill". Goodwill is the intangible asset associated with the positive reputation that the pharmacy enjoys. An estimation of the value of goodwill is approximately one year's net profit for an "average" pharmacy and two years net profit for an "above average" pharmacy.


In the example pharmacy, the net profit before tax. Using the data in Figures I and 2, the value of the pharmacy is estimated to be $254,626.





Net Worth


+ Goodwill


Purchase Price



Figure 4

Income to Owner from Net Profit and Purchase Payments


End of

End of

End of

End of

End of

End of



1st year

2nd year

3rd year

4th year

5th year

6th year

Value of Pharmacy








1. Ownership share to junior partner








2. Payment from junior partner*








3. Net profit from pharmacy**








4. Owner’s share of pharmacy ***








5. Owner’s share of profit








6. Total









*The value of the pharmacy is estimated to increase approximately 6 percent each year, so the payment for the incremental 10% share of the practice will increase proportionally.


**Net profit is expected to increase approximately 6% each year.



Figure 5

Income from Bonus and Profits and Projected Payments of Junior Partner

Years of

Income from

Income from

Net Profit and

End of Year

Transfer Agreement

Net Profit

Annual Bonus

Annual Bonus of

Payment to


Junior Partner

Current Owner
































*Junior Partner needs to save $272 per month to avoid borrowing

**Junior Partner needs to save $530 per month to avoid borrowing.