Buying A Pharmacy What You Need To Know

Now, if you’ve landed on this page – chances are you’re interested in buying a pharmacy business either now or in the future?

Am I right?

If so, prepare for an education!

Whether it’s the first pharmacy you’re buying, or you want to expand your pharmacy chain – or perhaps even are if you’re selling your pharmacy – I hope to give you some pointers that perhaps will aim to make the process a lot less daunting.

Now, even for an experienced buyer, if the last time you bought a pharmacy business was several years ago, will probably find that times have moved on, and the buying process today has changed.

As always, the demand is there for a successful pharmacy and the competition is just as strong today as it was 10 years ago – however, there are much more processes to go through and little room for error.

Now, when it comes to opening a pharmacy from scratch – this involves making an application to the NHS and can involve going through a very long process of consultations and appeals.

So not to bore you, I’ll keep that the subject of another article!

Why buy a pharmacy?

Now, the first issue to consider is – what is the reason for buying a pharmacy? Is it purely so you can be your own boss?

Now, in this instance – it may seem appealing – however a key point you need to consider is, will this new pharmacy make enough profit that it exceeds what you could ever get as a pharmacy manager?

If it produces merely enough to pay the salary of a locum – it may not be worth your time.

Consider that you will have to hire and fire, pay off loans, maintain finances, buy the stock and basically, work 6-7 days a week. You may find (especially in its infancy) that you can’t take any holidays for at least the first year.

Despite this sounding negative, don’t let this put you off! If you’re patient and willing to look at things in the long-term, perhaps 5-10 years, the financial rewards of having your own pharmacy can be great.

Just have a gander at the advertisements on the Pharmaceutical Journal. An example of one recently that has a Turnover of £715,000, did 5,400 items a month – they were looking for offers over half a million!

Borrowing the money to buy

Now before you let the six-figure sums scare your pants off, remember, most buyers will get a bank loan to buy a pharmacy – and generally, banks do consider pharmacists as being a good risk.

Try to find a bank manager who specialises in dealing with pharmacists, as they will understand the business and the requirements and can offer suitable advice and support.

They will often ask to have a look at the financials of a pharmacy that you are interested in, and you will be asked for a 12 month cash flow forecast as well as projected profit/lloss accounts. To prepare that business plan, you will need to hire a bookkeeper or accountant – preferably try to hire an experienced accountant with knowledge of the pharmacy sector.

Due to the length and complexity of the loan T&C’s, it is advisable to get a solicitor to go through the loan with you, and advise on any of the loan obligations.

Some of the large pharmaceutical wholesalers can provide a guarantee to the bank, and the bank will often make an overdraft facility available based on turnover. However, this loan will usually be provided on the condition that you purchase a percentage of your stock from that wholesaler – therefore depending on your business plan this could be a disadvantage.

The numbers

Here’s a quick run through of the actual numbers and jargon.

These are the crucial parts, and will decide on whether you make an offer for a pharmacy and you run a mile in the other direction!
Gross Profit – this is the turnover minus costs (such as salaries of staff, rent,etc). You’ll need to make sure you know exactly how its been calculated. Typically they will range from 25 – 40%, depending on the pharmacy. You should aim to get one at 30% at least.

Net profit – this is the gross profit, minus all overheads. (this excludes loan repayments used to buy the business)

Overheads include things like your own salary, staff salaries, insurance, rent, electricity, travel costs and many others.

Now, you can choose what you want to do with the money. After settling any loan repayments, many will perhaps leave it in the business account, reinvest the money into the business or perhaps even pay themselves extra on their salary.

Now here’s the big one… how much money can be made!

You may hear rumblings of “things weren’t as good as they were in the old days”. And certainly with the Category M clawbacks, it may be more difficult – however that’s not to say its impossible. Bu buying a pharmacy, at the right location, you can definitely create a good profit.

If purchased for the correct price, and ran correctly, a handsome profit is definitely be generated from a pharmacy. I know from the experience of my old pre-reg tutor – he went on to buy a pharmacy in the Midlands that was ran inefficiently and was a dying business. However, by implementing some key changes, running the business efficiently, and working long hours for the first year – he brought the pharmacy from a sub-500,000 turnover to almost £900,000.

A good opportunity is probably unlikely to arrive on your doorstep, so you need to spread a fairly wide net to come across a good opportunity. Both in terms of geographical location and the number of monthly items.

Which leads onto the next section…

How to find a suitable pharmacy?

When buying a pharmacy, there are a few methods you can use.

  • Using agents who are business brokers – who put buyers and sellers together.
  • Speaking to pharmaceutical wholesalers – with their contacts they could put you in touch with someone looking to sell a pharmacy
  • Advertise – you could take out space on a pharmacy magazine – however can be costly and may not get much response
  • Reading press advertisements on the internet or pharmacy magazines – can be a good source

By far the most efficient use of your time will be to use an agent who will find a business for you. However, do not jump on the first opportunity – always do your research and due diligence.

The value of a pharmacy business

Once upon a time, pharmacists would used to base the worth of a pharmacy, on the turnover. It was the old “pence in the pound” based system. For example, a pharmacy with turnover of £900,000, was said to be worth 90p in the £1, and so the value of it was £810,000.

Things are not so simple now, and there has to be a consideration given to the net profit of the pharmacy, in order to give a valuation. So you would usually need access to the latest accounts trading figures.

After calculating net profit, adjustments are made and a true net profit is generated.

A pharmacy agent should be able to show you a true net profit calculation for a business.

Once there, this figure is then multiplied by 5, or 7, to give the valuation. However, even after this, a pharmacy could still have an additional premium value, so it acts as a rough guide.

What else determines the value?

There are other factors affecting the value aside from the financials. Some of which include the following:

Location

This is a big one, and this can make or break even the most efficiently run, or even badly run pharmacies.

Obviously, one that’s located right next to a surgery or even inside a health centre will have a high volume of items (10,000+ items) and will fetch a higher price.

Rural pharmacies may fetch a lower price, purely because there is less demand for a pharmacy in a remote area – whereas a large city like London will attract a premium price.

Staffing

If the pharmacy is overstaffed – this will negatively impact the value, since this will take a chunk out of the net profits.

Source of income

Another consideration is where does the majority of the profit come from? Is there a high level of OTC sales? Or perhaps does it deal with care homes or MDS trays? Having to deal with these items are more labour intensive, and hence will affect the value negatively (if each accounts for more than 10%).

Growth Potential

Can the business be grown and developed, or has it reached its limit? If it has potential, these tend to attract more buyers and more competition.

Trading Hours

The longer the pharmacy is open, the more it impacts staffing costs and the more it affects the profits and hence the value. The only exception being London – this issue doesn’t tend to affect the value.

As for 100 hour pharmacies – anything under £800,000 turnover is deemed not very profitable. As a rough guide, 100 hour pharmacies tend to market at around 50% of a normal contract.

All in all however, you can still have a premium price attached to a pharmacy – which depends on demand from buyers. In such cases, a pharmacy could fetch from 20-40% over the bank valuation.

Goodwill

The value which you will often see quoted in any advertisement selling a pharmacy business, will often be called “goodwill”.

Goodwill is the value which takes into account the reputation, the client case and profitability. And it includes the pharmacy’s dispensing contract in the sale. It usually incudes the fixtures and fittings, however, ownership of the premises and the stock will often be an additional cost.

Making an offer

Ok, so you’ve done your research, looked at the location, financials and all other details. However, what exactly are you buying and how can you be sure you’re not making any mistakes?

Do you buy just the business assets, or the entire company?

Generally, you just want to purchase the assets – which I goodwill, fixtures and fittings, stock,etc. This is the most straightforward and incurs minimal fees.

You may be offered to purchase the company – which means you acquire all its history – so make sure you have a solicitor on hand to check things out before you go ahead with this.

Leasehold or freehold?

If they own the freehold of the premises, you may be offered to buy this, or taking on the lease. If getting the freehold, make sure you have it independently valued to make sure you get a good deal. Since it can be costly to acquire the premises, vendors are often flexible and will normally retain ownership of the premises if needed. If leasing, you should obtain finance for at least 10 years.

Make sure you are backed financially when making an offer – and demonstrate that you are in discussions with your lender. This is especially important when you are making an offer and are in competition with other buyers.

Ask – why are they selling?

An often neglected part of purchasing a pharmacy, but an extremely crucial point.

Pause for thought and ask” why are you selling?”. There will be a range of reasons or selling, some of which make it more valuable, some which may decrease value. That’s not to say you should be looking at every potential purchase with suspicion, but just bear this in mind.

How is the competition doing?

Now in this instance, you actually want the competition to be doing a lot better than the pharmacy you are purchasing. The reason being you want there to be a potential for growth from your pharmacy, and it shows that there is a customer base out there in the surrounding area.

So after buying a pharmacy – how to grow business?

Now, this should be the subject of another article, but I will skim over a few trips that should get you started.

Assuming you have obtained your fiannce, you put the offer in and was successful – the next stage is to now improve the business so you can claw back some money.

Generally, a 20% gross profit is do-able for many pharmacies – add on dispensing fees and essential services payments and you should make a handsome profit if you’ve played your cards right.

I have seen a few flailing pharmacies that were not making an effort to do essential services, only to have a new owner come in and add over £40,000 to their bottom line.

A few things you could do to grow a pharmacy

  • Put up a notice promoting the fact that you do smoking cessation consultations, EHC, MURs,etc. (Just do not promote it to the point where you are giving a bottle of shampoo away for doing an MUR for example – there are rules against this)
  • Meet with local nursing homes about potentially supplying medication for the residents – this can mean a lot more legwork however, it will improve the bottom line.
  • Become more active in letting patients know about the availability of weekly MDS trays – again, more labour intensive however, if you can convince the surgery to repeat weekly scripts, it means you’ll be paid 4 times more in dispensing fees.
  • Be careful not to change the product range too much – existing customers may then shop elsewhere and take their repeats prescriptions with them if you stop stocking their usual supplies. Even if it means selling some items at a loss or break-even, just make a larger markup on other products.

So hopefully this has given you a bit of a background and general overview – however, please don’t think of this as the absolute guide to buying a pharmacy. There are many elements to it, some which I may have neglected in this article. SO I advise you strongly to seek professional advise, perhaps sign up with an agent and get opinions from other pharmacists as well.

Good luck with your future ventures, and please let me know if you have any stories or require any advise on some aspect, I will do my best to help.