First time buyers guide to identifying a target pharmacy
Modiplus • Oct 22, 2020
Finance experts Umesh Modi and Vinku Shah advise first-time buyers on the steps they should take to make the acquisition a smooth process…
We summarise some of the factors to consider when identifying a target pharmacy.
1) Location
It is important to note that a good opportunity rarely lands on your doorstep and therefore you may need to look further afield for the pharmacy that meets your requirements. Once you have identified that pharmacy, you should also research the environs of the target pharmacy for example whether there are any surgeries nearby, what is the closest competition, is there regular passing traffic, parking availability, any planned regeneration of the area, etc. All these factors although not exhaustive, can have an impact on the business and therefore should not be overlooked.
2) Dispensing base
A pharmacy with a higher number of dispensing items (usually 5,000 items dispensed per month on average and above) is generally attractive as it reflects the big patient base although such pharmacies tend to have a higher price but are also attractive for lenders provided the buyer has sufficient security, funds, etc. If the target pharmacy has a lower number of dispensing items, you should research thoroughly whether there is scope for increasing the numbers.
3) Growth potential
Turnover and profitability growth are important factors to consider when purchasing a pharmacy for example are there any services currently not being offered which could add to the turnover and in turn increase profitability. A review of the current overheads could also help identify areas where costs can be reduced for example is the pharmacy relying heavily on locums? Are there any leases for equipment and can these be renegotiated with better terms?
4) Turnover split
Usually the turnover would be made up of NHS remuneration, over-the-counter sales (OTC) and service income. OTC and service income usually has a greater margin than NHS turnover and therefore as a buyer one should consider whether there is scope for increasing these so that it adds to the overall profitability. One should also consider if there is scope to increase the NHS turnover – this would be the case where the percentage of electronic prescriptions to total items dispensed is below 90%.
5) Gross profit
The gross profit is calculated as turnover less the cost of buying drugs that have been sold and when taken as a percentage of sales, it ranges between 25% - 35%. A pharmacy with a gross profit of 25% usually indicates that the buying of the drugs is not efficient and there is room for improvement through scouring for deals with the suppliers. Higher margins are achieved through higher greater services income.
6) Staffing costs
Staff salaries, National Insurance Contributions and pensions are the highest overhead for community pharmacy, and these should be reviewed. The staffing costs should be generally 6 - 8% of total turnover for an owner managed pharmacy. Legal advice should be sought if staff are not to be retained post completion as redundancy costs may have to be paid.
7) Innovation
With the community pharmacy sector becoming more competitive, it is important to streamline repetitive processes to create time for the provision of value-added services which will increase the patient base and lead to long term growth. There are various innovative products available in the market for example investment in robots for dispensing which will also attract tax relief as well as improve the bottom line in the long run. Alternatively leasing of equipment could ease cashflow as well as reduce the corporation tax as the lease rentals will be tax deductible.
8) Premises
If the vendor owns the freehold of the premises from which the pharmacy operates, they may offer to sell it although it is a rare occurrence. In such a scenario, the buyer should get an independent valuation of the premises to ensure that they are not overpaying for the premises. If the premises are offered as leasehold, it is very important that the lease can be assigned to the buyer. Generally, the lease should be in line with the term of the mortgage if borrowing from a bank for example, if borrowing for a term of 15 years then the lease should have an unexpired term of at least 15 years. If there is a long enough lease in place already, then you should check on when the rent review dates are as you will need to reflect this in your projections.
9) Financing
It is important that the buyer has sufficient level of funding and security in place to complete the transaction. This would generally cover the purchase price, legal and professional fees for solicitors and accountants, valuation fees, payment for stocks if agreed separately, net assets in case of a company purchase, etc.
It is advisable to engage with a pharmacy specialist lender early in the transaction as they will be able to advise you on the lending requirements.
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.
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