Whether you are buying your first pharmacy or about to sell up and retire, here are a few key tips which will help manage the sale process and minimise everyone’s stress levels.
If you are buying:
Understand your financial position, how much you can borrow, who will lend you the money and how much you can afford to repay.
Don’t overlook the costs of buying – such as legal fees, accountant’s fees, bank funding and valuation fees etc.
Visit the pharmacy you are hoping to acquire so that you can see the location, proximity of competitors and doctors’ surgeries. Check out if anything is happening in the locality which could affect the business in future.
If you are selling:
You cannot sell your pharmacy for the best price unless you know what it is worth. Having an up to date valuation will help you to understand the value of your business and whether or not the decision to sell is the right one for you.
Make sure all your financial information is up to date, including your accounts. Lack of information will result in poor offers for your pharmacy.
If premises are leased the lease needs to be renewable and transferable. You will also usually need a minimum 10 year term left on your lease.
Most importantly appoint good specialist pharmacy advisers to help you through the process.
In 2016, we achieved pharmacy goodwill values of between 5.9 and 17.3 times EBITDA (earnings before interest, tax, depreciation and amortisation). With such large variations in pharmacy prices it illustrates how important it is to market the pharmacy properly to achieve the maximum price.
An interesting thing is that by selling your pharmacy you can realise a substantial lump sum which would take you many years to earn as a pharmacist.
Take the example of a pharmacy we sold recently in the South East. This pharmacy had a turnover of £1.1m and EBITDA of £259,000. We obtained a goodwill value of £1.8m which was 7 times EBITDA. In terms of pence in the £1 this was £1.63.
The owner was entitled to entrepreneurs’ relief and therefore will only pay tax at 10% on the sale leaving them with £1,620,000 in their pocket.
If that pharmacy owner had continued trading instead of selling assuming that they were able to maintain the profit level at £259,000 per annum their net position after tax (using current tax rates) would be:
Annual profit £259,000
Corporation tax (51,800)
Tax on dividends (62,200)
Net income after tax £145,000
To earn £1,620,000 it would take them just over 11 years (£145,000 x 11.17).
We sold one pharmacy last year where the vendor would have had to work for another 20 years to make the same amount as he did from the proceeds of his pharmacy sale!
If you are thinking now may be the time to move on or release a lump sum for retirement, contact Anne or Scott for an informal discussion and a free valuation.
Scott Hayton, Director at Hutchings Consultants gives his view on the implications of the funding cuts.
“The decision by the Government announced by PSNC on Thursday 20th October has dashed the hopes of pharmacists, patients and other stakeholders across England, that the new pharmacy minister Mr Mowat would listen to the opinions, independent data and various petitions that have presented and gathered huge momentum across England over the last 10 months.
Having studied the figures released by PSNC on Thursday, the announcement appears to have confirmed the longstanding expectation within the market that the average pharmacy’s bottom line profit will be hit by around £15,000 following the cuts. In addition it has also confirmed that there will be further cuts in next year’s budget for 2017 – 2018.
(main source of information included in this text was taken from PSNC website)
On 20th October 2016, as part of the two-year final funding packing imposed upon community pharmacies in England, the Department of Health confirmed the introduction of a Pharmacy Access Scheme (PhAS), with the stated aim of ensuring that a baseline level of patient access to NHS community pharmacy services is protected. The Department of Health states that the PhAS will protect access in areas where there are fewer pharmacies with higher health needs, so that no area need be left without access to NHS community pharmaceutical services.
Qualifying pharmacies will receive £11,600 in 2016/17 and £17,600 in 2017/18 meaning those pharmacies will not feel the full effect of the reduction in funding from December 2016. At this point, the payments are guaranteed for 2 years but after 31st March 2018, it is not clear yet what will happen with this scheme.
Eligibility for the PhAS
Pharmacies do not need to apply to the scheme to be eligible; eligibility has been calculated nationally by the Department of Health, based on data relating to how many prescription items a pharmacy dispensed in 2015/16, to assess their size and data relating to the distances between pharmacies. Continue reading →
Is it time to sell and is selling the right thing to do? Ultimately, only you can answer these questions. Here are a few points to consider:
Factors such as interest rates, the availability of credit and the tax regime are outside your control. However, interest rates and availability of credit are two key factors for pharmacy buyers. With banks keen to lend to buyers and interest rates at historically low levels, acquiring a pharmacy is currently an attractive proposition.
Tax rates – on a business sale are favourable. For most pharmacy sellers the situation is straightforward: providing you qualify for Entrepreneur’s Relief – which most pharmacy owners do – you should only pay 10% capital gains tax on the sale of your business.
Government cuts – The squeeze on government spending has inevitably had an effect on pharmacy services. Despite an ageing population and a year-on-year increase in prescription items, pharmacy turnover has been fairly static in recent years. Pharmacy goodwill values though, have been holding up. What does the future hold for goodwill value? Continue reading →
It sounds obvious, but to achieve the best price for your business you must make sure it is prepared for sale. If you are planning to sell now the best thing you can do is ensure that your financial accounts are up-to-date. If buyers have to wait for such information any offers you receive will be low, based on the lack of knowledge.
One of the first things a buyer will look at is gross profit. Have you any idea of whether this is high or low for your business compared with other pharmacies? If the pharmacy is underperforming by industry standards this will inevitably affect the price you get when you sell.
Are you carrying too much stock? Buyers will sometimes put a cap on how much stock they are prepared to take. An experienced buyer will know what the stock levels should be for your type and size of pharmacy. Do you? Continue reading →
If you are selling a pharmacy, the value of your business will be based on its profitability. The banks will value your business, and the buyer will make an offer, based on the latest set of accounts and up-to-date trading figures, so ensure you have these available.
A key figure from the accounts is Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA). When calculating a value for the business lenders will typically take a multiple of the EBITDA ranging from around 5 to 7 times.
Profitability apart, there are other factors that impact on the value of a business. Location is obviously important. A pharmacy in a health centre or next door to a GP surgery would generally expect to command a higher price, for example.