Pharmacy Capitalisation Rates

Published Fri, October 7 2011 4:52pm by Frank Sirianni

Pharmacy Capitalisation Rates

Hello!!! I'm a 4th year pharmacy student at Monash University. As a member of the Victorian Pharmacy Student's Association I have heard about Medici and the services it provides. I am currently undertaking a management assignment that requires us to valuate a community pharmacy. I have decided to use Discounted Cash Flow and Capitalisation of Future Maintainable Profits to help me but have hit a snag! How do i calculate the discount rate and capitalization rates? are there current industry figures that i can use? If so, where can i find these figures?Thank you in advance!

Thank you for your enquiry!

Yes, we have been involved with the Victorian Pharmacy Student's Association and conducted a number of briefings for pharmacy students to assist them with business/management concepts in pharmacy.

The 2 methods of valuing a pharmacy you have chosen are good ones to use. For your reference, here is a breakdown between the different valuation methods:

Method: Explanation: Uses:
Discounted Cash Flow (DCF) The pharmacy value is the present value of the future cash flows from that business. Pharmacies with a finite life or varying annual cash flow.
Capitalisation of Future Maintainable Profits Maintainable profits are estimated and capitalised using long-term market or industry discount rates. Pharmacy with a presumed "infinite life".
Assets plus Goodwill The going concern value of assets plus goodwill for expected future income. Relatively new pharmacies or where future cash flows are uncertain.

The choice of methods depends on the ability to forecast revenue and expenses and the purpose of the valuation.

However, the most common one used in industry is the Capitalisation of Future Maintainable Earnings.

To discuss the current capitalisation rates for pharmacy, please contact Medici Capital.

The capitalisation rate appropriate for a pharmacy reflects its desireability and:

  • Gross profit margin;
  • Rent terms and costs;
  • Pharmacy characteristics;
    (Inc. Location, Product Mix, Presentation, SWOT)
  • Prevailing interest rates (overdraft) plus allowance for risk.

Current capitalisation rates for pharmacies in Australia range from 14% (lower from premium sites) for metropolitan pharmacies up to 20% or more for rural pharmacies. However, the capitalisation rate chosen for the valuation of a particular pharmacy will be dependent on a number of factors. When we complete our valuations the capitalisation rate is calculated based on over 60 metrics based on the qualitative and quantitative characteristics of the pharmacy and our capitalisation rates are calibrated each year to market data.

Discount rates are a little more complex and will depend on both the factors identified above and expected growth levels of the pharmacy.

It is important to note that the asking price is not related to turnover. Rather, it's a function of the expected maintainable income to the buyer. Value assumes a willing buyer exists and there is sufficient time to market the pharmacy properly.

Best of luck with your assignment!

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