Are you thinking of buying a pharmacy?
Modiplus • Jun 10, 2022
Finance experts Umesh Modi and Vinku Shah advise first-time buyers on the steps they should take to make the acquisition a smooth process…
Acquiring the first pharmacy can be a challenge to most pharmacists especially when they do not have the necessary skill in reading the numbers presented in terms of the target pharmacy’s performance and how to interpret these in order to arrive at a valuation for the purpose of submitting an offer. Without the guidance of a specialist accountant in community pharmacy, one of the major risks is that one could end up paying more than what the pharmacy is worth. Once the offer is accepted, there are other challenges to overcome to get the deal over the line.
Our sister company Silver Levene LLP, a chartered accountancy firm with a specialist community pharmacy department, can help make the acquisition a smooth process for you:
1) Assessing the risk
Once the target pharmacy has been identified, we can assist with assessing the risks and advise if it would be a viable investment so that you are able to make an informed decision. At this point, we will gain an understanding of your knowledge of the target pharmacy and be able to provide you with further guidance on income/profit generation and growth potential.
2) The valuation of the business
Based on the information already provided by the seller’s agents, we may request further data in order to work out a valuation for the pharmacy and provide you with a range of offer to submit. This is to ensure that you are not overpaying for the target pharmacy and bidding within sensible parameters.
3) The negotiation process
Sometimes when the initial offer is not accepted, a negotiation may take place and we would provide guidance on how to go about it with a view to successfully bidding for the target pharmacy.
4) Financial and tax advice whether an asset purchase or a company purchase
The target pharmacy may be sold as an asset sale which usually happens when a chain is selling one of its pharmacies or it could be a company sale whereby the vendor(s) may own only one pharmacy and are selling the company’s shares (this is common when the vendor(s) are retiring pharmacists).
Each of these transactions will have their own financial and tax implications that will need to be considered at the time of acquisition and we will provide sound advice in either case with a view to maximising your tax benefit and protecting you from over-paying through inadequate due diligence.
5) Accounts and tax due diligence
This is the crux of the whole transaction and we advise all our clients (first time buyers as well as those expanding) not to compromise on this. We carry out a thorough and an in-depth review of the accounting records and information provided by the vendors, conduct our own independent checks to support the figures presented and liaise with our client throughout highlighting areas of concern. One of the major risks, for example, in a company purchase is that there may be undisclosed liabilities or overstated assets and if this is not accurately verified, you could end up paying a lot more to the vendors potentially leading to long standing disputes to recover sums overpaid. Litigation could take years, is a distraction and very costly indeed. It is far better to seek professional advice from the outset from an experienced firm then to have to face a dispute after the acquisition.
6) Financial and tax aspects of the asset/share purchase agreement
The asset/share purchase agreement is a binding agreement between the parties encapsulating the mechanism of the sale price, payment terms, financial and tax warranties, indemnities and tax covenant etc. We review these agreements in detail, particularly to the financial and tax matters to ensure that and any risks are identified and mitigated through requesting relevant clauses be inserted/removed in the agreement.
7) Loan to finance the purchase
The acquisition is most likely to be financed by borrowing from lenders and we have a panel of pharmacy specialist lenders that we introduce our clients to. The lenders understand the community pharmacy business and are willing to work with ambitious pharmacists/entrepreneurs and to help them grow. As we conduct considerable business with many of these lenders, we are often able to negotiate better terms for our clients. The lending fee or interest saving can sometimes more than cover the cost of our services to you. Each case is judged on the creditworthiness/security of the borrower.
8) Business plans, cashflow and profit forecasts
As part of our complete due diligence package, we assist in drawing up the business plans, cashflow and profit forecasts which will be required by the lenders to secure the finance for the acquisition.
9) VAT/PAYE registrations
Within 4 weeks of completion date, we will assist you with registration with the relevant authorities for all taxes for example VAT, PAYE, Self-assessment, etc.
10) On-going accounting/tax services
Post completion, we offer a range of compliance services like bookkeeping, MTD compliant VAT returns, payroll, management accounts, annual accounts, corporation tax, personal tax, tax planning, financial services etc. You will have a dedicated and well-trained team dealing with your all your accounting and tax requirements.
11) Recommending pharmacy specialist service providers
We deal with several pharmacy specialist service providers such as solicitors, lenders, stock takers, etc that we introduce to our clients. We recommend using professionals that specialise in community pharmacy as they understand the business and its requirements thereby saving valuable time and costs.
As daunting as it may sound, buying your first pharmacy need not be a complicated affair as long as you use the right professionals who may seem slightly more expensive at the outset but will save you a lot of time and cost in the long run as they will be able to deal with any complications of the transaction efficiently.
This article is based on current legislation and practice and is for guidance only. Specific professional advice should be taken before acting on matters mentioned here. Should you require any advice please do not hesitate to contact us.
Welcome to the spring edition of our quarterly newsletter Initial reaction to Pharmacy First Recent research conducted by AIMp found that 70.8% of the pharmacy owners do not think there is sufficient funding allocated for the scheme, 20.8% say it is too early to say and just 8.3% responded saying it was adequate. Their #Fight4Pharmacies campaign was also launched on 20 March 2024 outside Parliament which created an extensive amount of interest with the media and politicians. The success of the Pharmacy First scheme will vary and depending on factors such as local implementation, public awareness, pharmacist training etc. To address funding shortfalls, pharmacy owners need to explore other options such as reallocating resources, securing additional funding and enhancing relationships with GPs. Pharmacy contract and funding The old contract has expired, however, there is no news regarding the pharmacy funding negotiations. The negotiations are taking place between Community Pharmacy England (CPE) and the Department of Health and Social Care (DHSC) , supported by NHS England (NHSE) . The reasons for the sale of community pharmacies The sale of community pharmacies can occur for various reasons and under different circumstances as follows: - Retirement - You may choose to sell your business when you reach a retirement age or decide to exit the profession for personal reasons. Selling the pharmacy allows you to liquidate your assets and transition into retirement. Relocation - Changes in your personal circumstances or opportunities in a different location may prompt you to sell and move elsewhere. Relocation could be due to family reasons, lifestyle preferences, or professional opportunities. Financial reasons - Financial challenges or the desire to capitalise on the value of the pharmacy may lead you to consider selling. This could include factors such as declining profitability, changes in reimbursement rates, or the need for additional capital investment. Expansion or consolidation - A multiple may acquire as part of their expansion or consolidation strategies. Selling to a larger entity can provide you with higher value in some cases. Launch of Pharmacy First and providing new services - The running of pharmacies has undergone several changes over the years, particularly with increased automation, digitalisation, and expansion of online services. The model has gone through a complete overhaul. We are seeing lots of our clients for whom we provide accountancy services at Silver Levene who are struggling with Pharmacy First services due to staffing issues which is resulting in decline of their profit margins. Market dynamics - Changes in the healthcare landscape, regulatory environment, or consumer behaviour may influence your decision to sell. Adapting to evolving market conditions or responding to competitive pressures may involve selling the pharmacy to a buyer better positioned to navigate these challenges. Following large corporate disposals, we are now seeing the goodwill value increase compared to last quarter, which makes it an ideal time to exit, if you are looking to sell. With bank interest rates likely to go down from June, affordability becomes easier too. Succession planning - You may sell your pharmacy as part of succession planning efforts, either transferring ownership to family members or grooming internal staff to take over management. Selling the pharmacy ensures a smooth transition of ownership and management responsibilities. The sale of community pharmacy is typically a complex process that involves legal, financial, and regulatory considerations. You as pharmacy owners may work with sales agents, financial advisors, or legal professionals to facilitate the sale and ensure compliance with relevant laws and regulations governing pharmacy ownership and operation. If you are thinking of selling, it is paramount to get your house in order and speak to your accountant well in advance and prior to putting the pharmacy on the market. We can provide accountancy and taxation services through our associated company Silver Levene with a proven track record of over 30 years. Changes in ownership With last year’s corporate disposals, the tide has turned, and more pharmacies are now run by independents compared to corporates. The recent Sigma conference in South Africa highlighted this issue, as shown in the table below courtesy of RWA Pharmacy:
Welcome to the winter edition of our quarterly newsletter The future of community pharmacy Nobody knows the future of community pharmacy and the right time to sell. As always, you should consider selling when there is no threat to your business that will affect its goodwill. You might decide to sell due to retirement, ill health or you are going into a new venture. We have seen goodwill values drop in the last 12 months or so due to corporate disposals and other distressed sales flooding the market. But it’s not all gloom and doom as equally, we have been extremely busy completing many deals over the last quarter. Most of the transactions have been to first time buyers, independents, small and medium size groups with a forward-looking plan to grow while the large multiples downsize. We believe next year will present a good opportunity to exit, if you are looking to sell the business, as interest rates start to fall, cost of living crisis abate, and the banks start to lend proactively again. Pharmacy First service This service will launch on 31 January 2024 which will be a new advanced service and will replace the Community Pharmacist Consultation Service (CPCS). The pharmacies will receive a first initial fixed payment of £2,000 that can be claimed from December 2023 and a monthly fixed payment of £1,000 from February 2024 for pharmacy contractors who reach a minimum number of monthly clinical pathway consultations (from 1 consultation in February 2024 to 30 consultations from October 2024). Community pharmacists should seize the opportunity and provide maximum amount of services that they possibly can, to increase sales and profits to mitigate the cost increases of the last couple of years. This will also increase the value of the business. The Pharmacy Show 2023 The Pharmacy Show returned to the NEC Birmingham on 15th and 16th October 2023. Over the course of two days, there were over 8,500 pharmacy professionals attending the show and over 300 exhibitors. A highlight of the show, an automation system (robotic) whereby even a small pharmacy can invest into one model for hub and spoke which was previously only an option for larger groups. There is a whole host of affordable options that will allow you to automate those everyday tasks such as dispensing medication and managing stock levels etc. Our joint stand with Silver Levene was located next to the Business Theatre where some excellent speakers with thought provoking ideas commented on the future of the pharmacy and new funding. Whilst exhibiting, we had numerous enquiries on selling and buying a pharmacy as well as pharmacists looking for an accountancy and tax advice. The show was a success, and we look forward to exhibiting again next year, our 17th year bar the covid years. Pharmacy Valuations If you are thinking of selling your pharmacy, we advise that you seek professional advice and valuation from a pharmacy expert or pharmacy sales agent. The valuation is determined by several factors to name but a few as a reminder: - EBITDA (Earnings before interest, tax, depreciation, and amortisation) profits – this is a preferred measure to value pharmacies and bank’s valuer will do the same. Financial information – Accounts, FP34s, VAT returns should be up to date. Location – pharmacies located in a health centre or next door to a surgery will still fetch abetter price, if there is more footfall too. Lease and rent – ensure there is at least 10 years left on the lease and is renewable. A very high rent will be a detriment to sale, buyers will account for any future rent and increases. Staff costs – high staff and locum costs will reduce the value of the pharmacy. NHS/OTC/services/wholesale/online/export sales – please ensure that these are analysed separately in the accounts. Growth potential – for example if you are not doing many of the services, the buyer will see this as an opportunity to enhance business and this is an attractive proposition for the buyer. Interest rates and buyers’ appetite The banks have maintained the level of lending appetite despite the rise in interest rates and economic pressures. We are pleased to report that most of our recent completion were to first time buyers which leads us to believe that they have a strong desire to acquire good, solid and profitable businesses. To facilitate their lending, many of the banks that are active in the pharmacy market are seeking increased due diligence, business plans, personal guarantee etc. The table below shows interest rates at their peak, and the prediction for 2024 through to 2027 (source Bank of England ).
In our Summer 2023 newsletter, we report on important matters relating to the pharmacy sector... NHS is 75! We celebrated the 75th birthday of the NHS on 5th July 2023, this milestone makes a perfect opportunity to recognise dedicated staff who make the NHS what it is today. Treating over a million people a day, the NHS touches all our lives. Community pharmacies are an integral part of the NHS, recognised for their hard work, dedication and making a key contribution most recently by administrating new record of 5 million flu jabs.
Thinking of Selling Your Pharmacy?
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