What do you need to know if you are looking to buy a pharmacy?
Here are some of the most important points and things to look out for.
Where to look?
Firstly, consider where you would be willing to commute/relocate to in order to get the right pharmacy for you.
It may not transpire that the pharmacy that you want to put a bid in for, will be on your doorstep, so consider this. It may be a good idea to sign up with a pharmacy agent that has the ability to look for pharmacies for sale across a large geographical area, just so you can expand your reach.
You may even find that there is an area that desperately needs a pharmacy – but doesn’t have one. In which case, would you be better to start a pharmacy?
Other options are to network with other pharmacists in your area, or speaking to pharmaceutical wholesalers – they are often privy to information on upcoming pharmacy sales.
You may even come across press advertisements on pharmacy magazines and you could even take out space on the same magazine, showing that you’re looking to buy a pharmacy.
There are a few options. The most popular way being a bank loan. Now for this, when there is a pharmacy you’re interested in, you will likely be asked to prepare a business plan, do a profit/loss projection and have a 12 month cash flow forecast – so be prepared to fork out for a specialist bookkeeper/accountant!
Another option, is a wholesaler loan guarantee scheme, such as those provided AAH or Phoenix. They can often provide a guarantee of the loan to the bank, and there will be an overdraft facility based on the turnover of the pharmacy. The condition on this loan will be that a percentage of the stock purchased by the pharmacy must be from that wholesaler, so this may affect your ability to secure the best profit margins on some products. However, one advantage of this route is that wholesalers do have a good knowledge of the pharmacy market and can offer useful advice to a novice purchaser about a pharmacy’s value and future potential.
How do I know the value?
The value you will often see quoted in the correspondence will often be called the “Goodwill” value. This value takes into account reputation, profitability and will include the pharmacy’s dispensing contract as well as the fixtures and fittings. However, actual ownership of the premises and stock will often incur an extra cost.
In order to get a feel for the profitability of the pharmacy, you will need acess to the latest trading figures, which shouldn’t be a problem once you express interest in a pharmacy. The way in which the value is normally calculated is by taking the Net Profit (the revenue minus all costs and overheads) and deducting further costs (such as pharmacist salary) and arriving at a true net profit. The bank valuation is often the true net profit multiplied 5 – 7 times – however, there may even be an extra premium value added onto this before the final valuation, especially for a particularly desirable pharmacy.
What else can influence the value? There are many other factors aside from the financial figures. Here’s just a few of them
- Location – if located next to a surgery or inside a health centre this will sell for a higher price. Rural pharmacies will go for lower.
- Staffing levels – overstaffed pharmacies will be negatively affected since it takes a larger chunk out of the net profit.
- Labour intensive income – while higher profits are always a good thing, some sources of income are better than others. If a large proportion of the turnover comes from dealing with MDS trays or nursing homes, an income stream will negatively affect the value if it accounts for more than 10% of the total.
- Growth potential – if there is still room for growth, this will attract more buyers, more competition and hence, a higher premium value
- Trading hours – tends to impact on staffing costs and consequently the profit margin. The only exception being London, which purely to the location always has a premium value. 100 hour pharmacies are only deemed profitable if turnover exceeds £800,000 and usually market for around 50% of a normal contract pharmacy.
Putting a bid in
With regards to the premises – just clarify that you are taking on a lease, if you don’t have the financial backing to buy the premises, and generally you should obtain finance for 10 years if leasing. You may be offered to buy the ownership of the premises – but just make sure to have it independently valued to ensure a good deal.
You may even be asked to purchase the entire company, rather than just the business assets – however, generally you will want to only purchase business assets (goodwill, fixtures and fittings, stock, etc). If you do decide to purchase a company, make sure you hire a good solicitor, as you will inherit any of its financial history.
Now before going in with a purchase, always pause for thought and ask yourself “why are they selling?” There could be a range of reasons, some making it more valuable, some decreasing value. I don’t want you to view every sale with suspicion but it’s an important point to always keep in mind.
So considering you have found the perfect pharmacy, the financials are in order and everything looks good – make your offer and make sure its clear that you have financial backing from your lender. A desirable pharmacy will most probably attract bids from dozens of buyers so do anything you can to look as serious and professional about the purchase as possible. You could offer to pay a bonus to the existing staff after you have completed the purchase – this can make you stand out.
The whole process when you’re buying a pharmacy will not be as straightforward as this guide, and you may find that it may take many months before you come close to purchase, and you may even have offers rejected in the process, but don’t let this deter you. Do your due diligence, hire the right expert advice and make an offer based on what makes the most business sense.