VALUATION INFORMATION
PAGE FIVE
Basis of Valuation
An underlying premise of this valuation is the existence of a willing buyer and a willing seller (refer page
8). The ability to find a willing buyer in regional locations can often be difficult and as a result large
increases to capitalisation rates are commonly attributed to such businesses, despite the economic and
commercial return often being greater than similar pharmacies located in metropolitan locations.
In light of the 49 opening hours per week, size, store format, service levels and on review of the current
trading volume the following staffing profile is reasonably estimated to be required:
Pharmacists:
Dispense Technicians
Shop Staff:
1.00
0.86
1.80
(expressed as a multiple of Opening Hours)
Armstrong Business Valuations Pty Ltd are of the opinion, assuming a willing buyer exists, no such
increase in the capitalisation rate is warranted other than the generally higher regional capitalisation rates
evidenced in the market (see page 8) . However, we do consider the time it may take to find a willing
buyer could be longer than in a metropolitan location. When these staffing levels are re-priced at current industry rates the total gross wages, which are below
the payroll tax threshold, is estimated at $298,285 per annum plus a $15,000 remote living allowance to
encourage professional staff to the remote location. This is the level of expense used in the FME on page
11 and 12-13.
This valuation report assumes that the whole of the business is being valued (refer page 8). The value
attributable to a minority interest (i.e. a non-controlling interest in the business) may attract a discount
attributable to the lack of control as well as any inability to readily sell the interest in the future (i.e. reduced
liquidity or marketability). Lease and Rent Expense Used in the FME
Total Sales and Gross Margin used in the Future Maintainable Earnings (FME)
The management Profit and Loss for the business for the period 1 st July 2018 to the 31 st December 2018
has been received. When annualised on a straight-line basis, Total Sales have been reasonably
consistent since financial year 2017. The sale of High Value Low Margin (HVLM) drugs are also
reasonably consistent. (approx. $400k per annum – see attached).
The pharmacy industry is characterised by various sales cycles such as holidays (Christmas), safety net
deadlines and seasonal health events such as the cold and flu season. Practical experience has shown
that on average 52% of pharmacy sales occur in the first 6 months of the financial year with the balance
of 48% occurring in the second 6 months. Armstrong Business Valuations Pty Ltd are also wary of using
the interim financial year 2019 Gross Margin given the lack of normal cutoff disciplines and stock count
associated with a full year ending 30 th June.
Accordingly, for the purposes of assessing Future Maintainable Earnings (FME), the Three Year Weighted
Average has been assessed as the most reasonable basis and used for Total Sales and Gross Margin –
see page 11 and 12-13.
Fair Wage Assessment Used in the FME
Armstrong Business Valuations Pty Ltd note that salaries and wages incurred by a pharmacy can be
impacted by a number of factors which may not occur if the pharmacy were acquired and run by an
“Average Competent Operator”. These factors include:
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-
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Above or below industry remuneration for proprietors or employees;
Over or under staffing relative to the actual work / hours required; and
Structural issues such as casual penalty rates or locum fees being paid when a permanent role
or a dispense technician could be employed.
Armstrong Business Valuations Pty Ltd has not been provided the premises lease or its terms other
than the lessor (unrelated) and current rent – supplied in the Pharmacy Profile. For the determination of
the FME the straight-line annualised financial year 2019 rent has been used– see page 11 and 12-13.
This is greater than the level of rent advised in the Pharmacy Profile.
It is an important valuation assumption that upon any sale a binding lease agreement is entered into under
materially the same expense as described above under commercially sound terms and conditions for a
period of not less than 5 years in length.
Franchise Fees used in the FME
The pharmacy has been run under management by Pharmacy Alliance for which it charges a fee. The
pharmacy manager notes “The fee is also including pharmacy alliance partner store fee, meaning
pharmacy alliance is running the store for us. Otherwise, any operator can join pharmacy alliance standard
gold member for $595/ month ($7140/ yr) will be able to get the same discounts level as we currently are.”
For the purposes of the FME on page 11 and 12-13, Armstrong Business Valuations Pty Ltd have
confirmed the Pharmacy Alliance fee structure and used franchise fees at the Gold membership level.
Nursing Homes
The John Mitchell Pharmacy services 29 beds at the Lilliane Brady Village aged care facility. The level of
turnover from this contract has not been provided but is estimated to be relatively minor at around 2.5%
of Total Sales in straight line annualised financial year 2019. There is only one other pharmacy in town
and the next nearest competitor is over 132 kilometres away.
Due to the above factors no adjustment has been made to the capitalisation rate to reflect risk of tenure.
Other SWOT Items
- The pharmacy also has a significant giftware offering and a New Zealand Ice Creamery.
A potential buyer will consider this opportunity in its assessment of the business. It is also noted the
pharmacy has been run under management. - Accordingly, a Fair Wage Assessment has been used to determine the level of wages an “Average
Competent Operator” would require to operate the John Mitchell Pharmacy at arm’s length and which is
consistent with the size, type and location of the business. No Balance Sheet for the business was provided. A notional estimate of the value of Plant,
Fixtures and Fittings, based on industry experience, has been used for the purposes of the
Goodwill split on page 2 and 14.
- We have been notified that generic substitution is 81% which is in line with industry averages
which are just over 80%. There may be some opportunity to grow gross margin from this area.
Armstrong Business Valuations Pty Ltd
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