Capital gains

What determines a pharmacy’s capitalisation rate? Natalie Sirianni explains

Pharmacy businesses are valued using the Capitalisation of Future Maintainable Earnings methodology.

This means that mathematically there are two factors in calculating a pharmacy’s value which are:

  1. Future Maintainable Earnings
  2. Capitalisation Rate

In today’s article we will focus on the Capitalisation Rate and how this is determined for a specific pharmacy.

In general, pharmacy market capitalisation rates range from 14% for high demand metropolitan pharmacies to 20% for more rural and isolated pharmacies. However, in certain cases we see pharmacy sales being achieved with capitalisation rates below this level.

Mathematically, the capitalisation rate for any given pharmacy represents the future maintainable earnings or adjusted net profit for the pharmacy divided by the sale price (or value of the pharmacy).

So, when it comes time to sell your pharmacy, your pharmacy business broker will assess and review a number of factors to determine the appropriate capitalisation rate for your particular pharmacy.

These factors include:

  • Growth – both historical and expected future profit growth
  • Financial performance and overall profitability
  • Location and accessibility including State, metro/rural and shopping centre type
  • Lease tenure
  • Developments in the area
  • Competition
  • Nursing home services
  • Level of contracted income
  • Methadone income
  • Market rates
  • Operational and financial risks
  • Reliance on the business owners
  • Pharmacy business supply vs demand
  • Pharmacy outlook and market sentiment
  • Interest rates or cost of capital

Essentially the more attractive the business will be to the market, the more a buyer will be prepared to pay for any given level of income and therefore the lower the capitalisation rate.

So in that sense, capitalisation rates are counter-intuitive because the lower the capitalisation rate, the higher the purchase price. Therefore, lower capitalisation rates generally correlate to more attractive or lower risk businesses.

When it does come time to sell your pharmacy, your broker will assess and review the above factors to determine the appropriate capitalisation rate for your particular pharmacy.

How is your pharmacy performing in terms of these characteristics? Is there anything you could change to improve these factors and therefore the capitalisation rate applied for your pharmacy?

Natalie Sirianni
Natalie Sirianni

To discuss capitalisation rates and the market in your area, call Natalie and the team at Attain Business Brokers on 1300 ATTAIN (288 246). I look forward to discussing with you further!

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