Making sure the price is right

Chris Vowles, Christie & Co’s head of valuation, medical, explains the process of how a pharmacy business is valued in an ever changing market

The pharmacy industry is often referred to as a ‘green-light’ sector in terms of securing finance for business purchases. However, in a market experiencing constant and rapid change, many factors including ownership, income mix, services and location can affect valuation. The pharmacy sector offers a unique challenge for RICS Registered Valuers when undertaking the valuation of a pharmacy.

‘Profits Method’
Pharmacies are principally assessed using the ‘Profits Method’ of valuation in which an ‘all risks’ multiplier is applied to maintainable profit, which a valuer assesses following a review of historic and current trading information. The multiple of profit, or ‘pence in the pound’ approach, can be used as a secondary check. Historically, this method was widely used in the sector until the transactional market became more sophisticated with a focus on debt serviceability by lenders. When valuing freehold pharmacies, the interest is split into its component parts, ie, the goodwill and the underlying freehold interest, because there is a defined market for leasehold pharmacy businesses and freehold retail investments. By splitting the elements and deducting a hypothetical rent from the business, we can compare ‘like with like’.

Formal valuation
The majority of pharmacies will have some form of debt funding and the lender will generally require a RICS formal valuation, both at the commencement of the term and periodically throughout the life of the loan. Formal valuations are used for a variety of other purposes, including probate, expert witness for court proceedings, partnership disputes, tax cases and internal management purposes for strategic planning. RICS formal valuations are regulated by the RICS and should be carried out by suitably qualified RICS Registered Valuers, with experience in the sector and exposure to the transactional markets, as solid sales evidence underpins all valuations. Competitive bidding in the pharmacy market can make it difficult to draw on previous ‘deals’ as precedents. There can also be a reluctance to reveal full details behind completed transactions due to the highly competitive arena. This is in contrast to other sectors, such as the residential market, where valuers might share information, providing a clear picture of the market landscape.

As the largest pharmacy broker in the UK, valuing in excess of 200 UK pharmacies per year, Christie & Co has a thorough understanding of the pharmacy market. All of its valuations are supported by a wealth of its own transactional evidence, as it is the only company involved in both the sale and the formal valuation of pharmacy businesses, giving it a unique insight into the sector. Christie & Co’s valuers are all RICS Registered Valuers, with a specific team of highly experienced valuers covering the pharmacy sector.

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