The important issues to be considered when acquiring a pharmacy, some of which will be explored more fully in subsequent chapters

The purchase of a business is a major financial commitment and, for most pharmacists, a long-term one. Before embarking on such a venture you must think carefully about why you want to buy. In my dealings with pharmacists over a number of years, I have come across two types of buyer.


There are those who like the idea of owning their own business, of being their own boss. They just want one retail outlet that will allow them to make a reasonable living. This can work well if you buy a pharmacy where you can make a good profit, which exceeds what you could earn as a pharmacy manager. It does not work so well where you acquire a business that does little more than pay a locum’s salary. In these circumstances you have just provided yourself with a job, and what a hard job it is!


In such a situation you will be responsible for hiring and firing staff; all the legal requirements (business and professional); paying off any loans; maintaining proper financial and patient records; ordering stock in a cost-effective way; and working long hours for six or seven days a week.


These are just a few of the tasks that come with running a business. You need to consider if this really is preferable to being a locum or employee in someone else’s business.


The first question for any pharmacist looking to make the transition from locum or employee to business owner should be: is the pharmacy I am going to buy able to provide me with a better income and better prospects than those I have now?


At the other end of the spectrum are pharmacists with entrepreneurial instincts who want to build a successful business. These pharmacists have a specific plan from the outset. They have a vision of where they want to be in five or 10 years’ time. They set themselves goals and targets. This type of pharmacist will have ambitious plans to expand from one retail outlet to several over a period of years. For pharmacists with drive and ambition, becoming their own boss can be very satisfying, and also very profitable.

This doesn’t mean that you should plan to build up a chain of pharmacies to make owning your business worthwhile. Just ask yourself whether you are satisfied that you will get a return on your business commensurate with the risks you are taking and the long hours you will need to put in. Spend some time looking at why you want to be your own boss, and carefully weigh up the pros and cons.

Business potential

Before you start your search for a pharmacy, consider what you want from the business. Do you want:

•  A ready-made business with a decent level of profit, which you can just take over to provide you with a good future source of income. This can work well providing you can maintain the profit level. You are likely to pay a premium for goodwill on this type of business, so if it does not go according to plan you will have a problem. You need to assess carefully the possible downsides of the business before committing yourself to the purchase.

•  A pharmacy with potential, typically a business with a fairly low turnover but huge potential for development – every business entrepreneur’s dream. If this is your ideal business you will need patience as it may take longer to find, but when you find the right one it will be well worth the effort. With this type of business you will be looking at implementing a good marketing plan, operating tight management and financial controls, and relying on your entrepreneurial skills paying off.

Anyone who is seriously considering buying a pharmacy should conduct their own research into the strengths, weaknesses, opportunities and threats that apply to that particular business.

Finding a suitable business

There are a number of options available when looking for a suitable business to buy. You could:
 

• Find a business yourself: Through your own contacts you may hear of pharmacies for sale. You could contact businesses in the local area. This could result in an inexperienced pharmacist paying over the odds for a pharmacy.

• Use agents who act as brokers: In other words, they put buyers and sellers together.

• Speak to pharmaceutical wholesalers: They are in touch with the market and may be able to put you in touch with a suitable pharmacy in your area.

• Advertise: This will be fairly costly and results are not guaranteed.

• Respond to press advertisements: Pharmacies for sale are sometimes advertised in the pharmacy press.

If you work full time your resources for finding a pharmacy will be limited. In these circumstances you may find it more effective to use the services of an agent who will provide a search service for you.

Be careful! Do not necessarily make an offer for the first pharmacy presented to you. Remember your future business must be able to provide you with a financial return that is better than the earnings of a locum or employee.

Finance and loans

One of the first things you must do is find out how much you can realistically borrow to finance your business purchase. As a general guide you should expect to contribute at least 20 per cent of the cost.

Traditionally banks have regarded pharmacists as being a good risk. In addition, some of the large pharmaceutical companies provide guarantees to the banks for their customers; enabling their customers to finance their new businesses at competitive interest rates. With a loan backed by a pharmaceutical company it is possible to borrow at  rates of between  approximately 1.75% to 3.5%  above base rate at the time of writing (January 2010).

If you use this type of scheme the banks will often make available overdraft facilities  based on a percentage of turnover. You may be thinking: where is the catch? It is simple: with such schemes you will be expected to purchase a percentage of your stock from the pharmaceutical company backing your loan. Whether you regard this as an advantage or disadvantage will depend on how you propose to purchase your stock.

We have noticed in the last year a gradual move from the wholesaler backed schemes to borrowing directly from the banks.

Calculating the loan repayments

As a rough guide, the monthly loan repayments over a ten-year period could be approximately as follows:

Assuming base rate is 0.5%

Add  say  2.5%  making the interest rate 3%

Over a period of 10 years the monthly loan repayments will be approximately £9.66 per £1,000 borrowed  

So if you borrow £200,000 the cost will be   

£9.66 x 200 or  £1,932 per month

Choose a bank manager who specialises in dealing with pharmacists. This means he or she should have some understanding of your business and banking requirements. This, in turn, should make the process of buying your pharmacy easier, and the manager should be able to offer you support and practical advice throughout the transaction. For example, NatWest has a specialist team of healthcare managers who are knowledgeable about the pharmacy market.

When you are applying for finance, expect the bank manager to look carefully at your proposed purchase and to ask numerous questions about the pharmacy: location, customer base, competition, local doctors, potential of the business, and so on. You need to do your homework thoroughly before submitting your application for a loan. The bank manager will ask to see various financial documents from the pharmacy, such as copies of the accounts, recent PPA statements or equivalents (to verify NHS revenue), and copies of VAT returns. In addition you should be asked for a cash flow forecast for the first 12 months of your ownership, and a projected profit and loss account.

It is advisable to prepare a business plan, which will indicate how you propose to run the business and develop it further. You are strongly advised to obtain expert help in preparing these documents. If you try to do it yourself you are likely to make mistakes unless you are a trained bookkeeper or accountant. An astute bank manager will notice immediately if the figures are incorrect and you will lose credibility. It is worth consulting accountants who have experience of the pharmacy sector as they will be able to prepare these documents. They should also provide guidance and support throughout the buying transaction and liaise with the bank on your behalf.

Experience does count. I come across pharmacies regularly that are simply not worth buying at the price being asked. Occasionally I come across pharmacies that are not worth buying at any price! It is better to identify this at the outset – after all a pharmacy purchase is a long-term commitment. You do not want to end up with a business that is unprofitable and difficult to resell. This is another reason to obtain the outside help of someone experienced in this market.

Your credit record is another area that the bank manager will review. The bank will want to know what other loans you have, what your current outgoings are, and whether you have been able to save on a regular basis. Expect your personal financial affairs to be scrutinised.

There are sources of finance other than a bank. A cheap form of borrowing is to raise money against the value of your home assuming you have sufficient equity in the property.  Financing the pharmacy purchase, will be explored in more detail in Chapter 2.

Financial information from the vendor

Once you have found a pharmacy that you think may be suitable, ask the vendor for the following information:

• Copies of the past three years’ accounts for the business (try for five years if you can).

• Copies of VAT returns for the past 12 months.

• Copies of PPA statements for the past 12 months.

• Up-to-date management accounts if available.

• Details of any lease you would be taking on. If the vendor owns the property and intends to grant you a lease, be clear as to the precise terms of the lease.

• If you are acquiring shop fixtures and fittings, precisely what are these and what is the cost relating to these items?

Once you have this information, give it to your accountant to evaluate. Again, it is important that you engage accountants with experience of the pharmacy sector, otherwise they will not know what the margins, stock levels and expenditure should be. Do not assume that the past accounts you are given are necessarily correct: an experienced accountant will be able to cast an expert eye over the figures and pick up inconsistencies and discrepancies. You should also physically examine the stock you will be purchasing for obsolete and slow-moving items. If necessary negotiate these separately.

Valuing the pharmacy

The value of a pharmacy is mainly in the goodwill. In addition, there may be some fixtures and fittings, and shop equipment, but the value of these items is usually small compared to the goodwill. When I value a pharmacy I take into account a number of different factors. Firstly, I am aware of how the sector is performing generally. This may be influenced by external factors such as the regulations controlling entry into the pharmacy contract. Secondly, I am aware of how other professionals are valuing pharmacies. For example, banks tend to  be conservative in their pharmacy valuations and there is often a large gap between the price which can be achieved on the open market and the banks valuation.

Many pharmacists like to value pharmacies by reference to pence in the pound. Whilst this can give an indication it is not a substitute for carrying out a proper valuation.

Finally, I scrutinise the vendor’s accounts and make adjustments to reflect what I consider to be a realistically achievable profit level for the purchaser. The net profit, after taking into account business expenses, should be sufficient to pay the purchasing pharmacist a good salary over and above what he or she could expect to make as a locum or employee. In addition, there must be sufficient profits to repay any business loans and allow for future investment in the business.

The other item requiring valuation will be the stock. This is dealt with by an independent stocktake at the time of completion. However, prior to this you should have examined the stock yourself to determine what you are being asked to purchase and its quality. You should also have an indication of the stock value at the outset so you can budget for the cost.

Should you buy a company or the business assets?

Given a choice, it is preferable to acquire just the assets: goodwill, fixtures and fittings, equipment, and stock. This is the most straightforward type of purchase and will keep your solicitor’s fees to a minimum. However, as more and more pharmacists are now operating as limited companies, it is likely that vendors will want to sell you the company as it will often be more tax effective for them to do so. This should not necessarily deter you.

A company purchase means that you will acquire the company with all its history (good or bad). If there are any irregularities they could surface later, after you have acquired the company. This is why it is important to have a good solicitor who is experienced in this type of work to ensure that the necessary indemnities are put into place to safeguard you should an unforeseen liability arise later. Because of this extra legal work your solicitor’s fees will be higher. If you are buying the vendor’s company discuss the additional costs with your solicitor at the outset and use this as a negotiating tool to reduce the asking price. If the vendor is saving a substantial amount in tax by selling the company he or she should not object to a relatively small reduction in the price to cover your additional costs.

If you are buying the vendor’s company you will have a trading structure already in place; if you are buying the vendor’s assets you will need to set up your own. This must be discussed with your tax adviser/accountant as early as possible in the purchasing transaction. Whether you decide to trade through a limited company, or be a sole trader or partnership, everything needs to be in place by completion.

I recommend that once the pharmacy purchase has been agreed, you prepare a comprehensive checklist with time-scales to cover everything that needs to be done prior to completion. To produce your checklist, liaise with your bank manager, accountant, solicitor and the vendor.

One thing that is sometimes overlooked is VAT registration. Customs & Excise take about three weeks on average to process a VAT registration so it is unrealistic to leave your application until just before you are due to complete. Oversights such as this can delay completion by several weeks.

Leasehold or freehold?

If the existing business owns the freehold of the pharmacy premises you may be offered a choice of either purchasing the freehold or taking on a lease which the vendor creates. If you are considering the freehold, you should have the property independently valued and surveyed to ensure that you know exactly what you are buying. Many first-time buyers will have difficulty raising the finance to buy a freehold on top of the finance required for the business goodwill. Vendors are often flexible when it comes to the freehold; they are happy to retain the freehold and look at the future rental income as part of their retirement fund.

If the vendor does create a lease you need to be satisfied that the proposed rent is a fair market rent and that the lease conditions are acceptable to you. Your solicitor should advise you in detail of all the implications. If you are obtaining finance for the purchase of the business the bank will be looking for a lease of at least 10 years.

Professional advisors

Surround yourself with a good team of professional advisors from the outset. They will be there to help and support you through the buying transaction and, after the purchase, to guide you through the early stages of the business when you are most likely to need advice.

It is essential to choose people with experience in the retail pharmacy sector. Your team should consist of an accountant/tax advisor, solicitor and bank manager. Ask each of them for an indication of their charges so that you can budget for these and include them in your cash flow projections. Don’t be afraid to ask them for references from other pharmacist clients they have dealt with. Only deal with people that you like and trust. It is important to build a good relationship.

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