Valuing a pharmacy

Largely, yes. Pharmacy goodwill attaches to the approved premises, the location, the lease and the trading systems, all of which pass to a new owner, and the Pharmacy Location Rules limit where a new approval can be granted nearby. That is why pharmacies typically carry more transferable goodwill than medical or allied health practices, where patients follow the practitioner. Some personal goodwill can still exist where the owner is the pharmacist in charge, holds the aged care packing relationships or works at a below-market wage, and the valuation adjusts for the cost of replacing that person.

Yes. Many pharmacies are held through pharmacist companies, partnerships or unit trusts with two or more pharmacist owners. We value the business first, then adjust for debt, surplus assets and working capital to reach equity value and apportion that to the interest. Whether a minority discount or control premium applies depends on the purpose of the valuation and on the partnership or shareholders agreement, which often sets out how a departing pharmacist's interest is to be priced. See share and equity valuations.

Financial statements and tax returns for the recent financial periods, current management accounts, and details of owner and related-party wages, rent and loans. Alongside those, the dispensing data does much of the work: monthly script counts split by PBS, private and over the counter, by general and concessional patient, and by standard and increased quantity supply, plus gross margin by category, program claim history, the most recent stocktake and ageing report, the lease and the wholesaler and banner terms. See what information is needed for a business valuation.

On maintainable earnings from PBS dispensing, retail sales and funded professional services, capitalised at a multiple reflecting risks attached to the approval, location, margins and workforce. Under section 90 of the National Health Act 1953 a registered pharmacist must apply to the Department of Health, Disability and Ageing for approval to establish a new pharmacy or to change the ownership of an approved one, PBS medicines may only be supplied at or from the approved premises, and the Australian Community Pharmacy Authority assesses applications against the Pharmacy Location Rules. Goodwill in a pharmacy valuation therefore attaches largely to the approved premises rather than to the individual pharmacist.

It is worth the maintainable earnings the pharmacy can sustain once the owner pharmacist is paid a market wage for the dispensary hours they work, capitalised at a rate reflecting the risk of those earnings continuing under a new owner, with stock paid for separately. The risk assessment turns on the security of the approved premises, the concentration of the script base and the depth of the buyer pool in that state.

They limit who can buy it. Pharmacy ownership is regulated by the states and territories, which generally confine ownership to pharmacists and pharmacist-controlled entities with limited friendly society exceptions, and most limit the number of pharmacies one person may hold an interest in. In Queensland an owner must hold a pharmacy business licence and must not hold an interest in more than five pharmacy businesses, or six for a qualifying friendly society. Victoria and New South Wales also set the limit at five, and section 55 of the Pharmacy Act 2010 (WA) sets it at four. Other jurisdictions should be confirmed with the relevant regulator. The valuation reflects the realistic pool of purchasers and the structure through which they could hold the business.

No. An approval to supply pharmaceutical benefits is granted to a pharmacist for particular premises, and a unique PBS pharmacy approval number is issued for each approved premises. An approved pharmacist may only supply pharmaceutical benefits at or from the premises for which they have been approved. The incoming pharmacist therefore applies for their own approval to supply at the same address, and the state or territory requirements for owning or operating a pharmacy business there must also be met. What the buyer pays for is the business, the lease and the goodwill of being the approved pharmacy at that location.

No. Each state and territory decides who may own or operate a pharmacy business, and the rules generally confine ownership to registered pharmacists and to companies or partnerships that meet defined conditions. Several jurisdictions also cap the number of pharmacy businesses one person or entity may hold an interest in. A pharmacist already at the cap in that state is not a buyer unless they sell something first, and outside capital cannot simply take a direct interest. The realistic pool of purchasers is part of what market value means for a pharmacy.

No. A section 90 approval is granted to a pharmacist for particular premises and does not pass under the contract of sale. The incoming pharmacist applies for their own approval at the same premises, and the Department asks for those applications at least 30 days before settlement. Value is attached to the address, not portable with the owner.

It is worth what it earns now, with the pending application treated as a disclosed uncertainty rather than as value already banked. The Department of Health, Disability and Ageing explains that under section 90 of the National Health Act 1953 a pharmacist must apply for approval to relocate a pharmacy, that the Australian Community Pharmacy Authority considers the application against the Pharmacy Location Rules and makes a recommendation, and that the Authority cannot override the Rules and can only recommend approval where satisfied that every requirement of the item applied under has been met. The Department adds that it may reject an application even where the Authority has recommended approval, and that the Authority may instead defer a decision to a later meeting. So neither the outcome nor the timing is in the owner's hands, and applications are considered at the Authority's published meeting dates. A valuation states the position at the valuation date, sets out what it has assumed about the application, and shows how the conclusion moves on each outcome.

It reduces the number of dispensing events for the affected medicines, which lowers dispensing fee and Administration, Handling and Infrastructure fee income, and the Additional Community Supply Support payment offsets part of that. The net effect differs between pharmacies depending on how many scripts are for eligible medicines and how many patients have moved to a 60-day supply. We measure it from the dispensing data rather than assuming an industry average, and we look at whether the freed dispensary time has been redirected into services that earn separately.

It depends on the pharmacy, which is why the effect is measured from your own dispensing data rather than assumed. Where a prescription is written for an increased quantity, one supply replaces what would previously have been two, so dispensing fee and handling fee income falls for those medicines even though the volume of medicine does not. The Additional Community Supply Support payment offsets part of that. A pharmacy with a high share of chronic repeat medicines is affected more than one weighted towards acute scripts and front of shop.

They affect the earnings side rather than the risk side. Where a patient receives twice the medication on one prescription, one dispensing event replaces two: the medicine supplied across a year is unchanged while fee income for those medicines falls, partly offset by the Additional Community Supply Support payment. How much reaches a given pharmacy depends on its own patient mix.

Because the approval attaches to the premises. If the lease ends and the landlord will not renew, the owner cannot simply trade from another shop. A relocation application under the Location Rules is required, and it has to fit one of the items, such as a move of up to 1 km or a move of more than 1 km and no more than 1.5 km. So a lease running down with no options left, a demolition or relocation clause sitting in it, or a rent review about to land all feed into both the risk assessment and the rent charged against maintainable earnings.

We replace whatever the owner actually takes with a market salary, including on-costs and leave cover, for a pharmacist working the hours the owner works in the dispensary. Draw less than that and the reported profit is flattered, so it comes down; draw more and it goes up. Relatives on the payroll are tested the same way. What is left is what a purchaser could expect to earn once someone is employed to do what the owner does.

Usually it is dealt with separately. In many pharmacy sales the stock is counted at or near settlement and paid for at cost on top of the price agreed for goodwill and plant, so a valuation states plainly whether stock sits inside or outside the concluded figure. Either way the stock file is examined, because dated, slow-moving and non-returnable lines overstate the value of inventory, distort cost of goods sold and tie up working capital that a buyer has to fund.

The owner's drawings are replaced with what it would cost to employ someone to do the same job. That means a market salary for a pharmacist working the hours the owner actually works in the dispensary, plus on-costs such as superannuation and leave cover. Where the owner takes less than that, reported profit is overstated and is adjusted down; where the owner takes more, it is adjusted up. The same test applies to family members on the payroll. The result is the profit a purchaser could expect after paying for the owner's role.

Heavily, because the approval attaches to the premises. If a lease ends and the landlord will not renew, the business cannot simply move to another shop: a relocation must fit the Pharmacy Location Rules, which are made as a legislative instrument and govern when the Australian Community Pharmacy Authority must, and must not, recommend that an applicant be approved to supply at particular premises. A short remaining term without options, a demolition or relocation clause, or an unresolved rent review therefore affects both the maintainable rent used in the earnings and the risk attached to those earnings.