In January of this year when Hutchings Consultants looked ahead to what factors could affect the Pharmacy sales market in 2020 at no stage did any of us anticipate that a global virus pandemic would come along to influence all aspects of our home and working lives. As we sit here in April, several weeks into a lock down and social distancing measures, the impact and effects of this pandemic are still being realised and understood but the way in which the sector has risen to the challenge and unprecedented pressures has been incredible to see. The impact on Pharmacy sales has so far been limited. Pharmacy has been one of the few face to face businesses to continue to operate on a day to day basis for obvious reasons but we felt it would be helpful to compile a brief report detailing how the sales market and constituent parts of the sale process have adapted to meet the current challenges.
Over the last few weeks we’ve seen an increased number of sale completions take place as buyers have been keen to complete on the sale and contribute to the much needed provision of patient healthcare. So far we have only had two sales temporarily placed on hold, not due to the buyers having any serious doubts but because of specific logistical problems arising as part of those individual transactions such as staff shortages due to illness/self- isolation or other factors relating to computer hardware install etc. Encouragingly we have seen a slight uplift in the number of new buyers registering with us to receive details of new pharmacy opportunities compared to the same period in 2019 (see graph).
Whilst the vast majority of these new registrants continue to be First Time Buyers, we have also seen a similar uplift in enquiries from existing pharmacy operators seeking to acquire. Due to the current restrictions on travelling and social distancing, we have been looking at alternative ways of progressing interest in marketed opportunities, encouraging potential viewers to make use of technology available to us all, undertaking video calls with sellers in place of a face to face meeting. This is allowing matters to develop at this difficult time whilst keeping both parties safe, able to continue in their vital day to day roles supporting the supply of medicines to the community. In terms of client instructions we actually took on the same number of new sales in March this year, despite Covid-19, as we did in March 2019 so currently we have not experienced any drop off in sales volume.
In terms of offers, the majority of our Pharmacy Consultants have received formal written offers on their marketed pharmacies from potential buyers since the start of the lockdown. The offers received so far have been across all price ranges and have been submitted by experienced owners as well as First Time Buyers which demonstrates the continued interest and activity in the sales market.
Lawyers & other Professional Advisers
Like ourselves most lawyers, accountants and financial advisers are making full use of available technologies to ensure they are open for business, to help support their clients.
Many professional advisors are working diligently to decipher and advise their clients on the multitude of changes and updates coming forth from HMRC and the NHS, including a raft of employment and taxation issues which will have potential implications for existing sales as well as future sales.
One of the recent developments has been the announcement of cash flow advances by each of the respective NHS bodies across the UK, designed to alleviate the immediate financial burden for contractors due to the unprecedented demand for items, subsequent ordering levels and staff resource problems as key team members are forced to isolate. This has led to queries from buyers currently in the throes of an acquisition and an acknowledgement across the sector that there must be a mechanism within sale documentation accounting for the advance sums and ensuring buyers are compensated for any reduced income post completion. It has also been highlighted by several lawyers in the sector, pharmacy owners who are considering approaching their Landlord to discuss a deferral of rent payment should carefully consider how this is done in conjunction with their legal advisers so as to avoid inadvertently triggering insolvency clauses in their leases which could worsen their situation.
These are just a couple of points which underscore the importance of consulting an experienced pharmacy professional in these turbulent times.
Another recent factor in the sales market at the moment is the temporary suspension of the Market Entry Application process by NHSE as of 25th March 2020. Currently, there is no information as to how long the suspension will last – we understand the underlying reason behind this decision is the suspected difficulty stakeholders may experience trying to undertake the consultation processes on applications during the Covid-19 crisis.
Whilst this suspension continues any sales which require a new application for Market Entry could be delayed, however we are in discussions currently with a particular law firm that is working hard to try and find a practical work around for this problem. Our advice as always remains to submit an application where required, at the earliest opportunity. You should still receive confirmation of its receipt and this should ensure that the application receives a number in what may ultimately end up being a queued backlog. For most sales it should still be possible to effect an exchange of contracts subject to the Market Entry application being granted. This change will primarily affect asset sale transactions but since a significant proportion of sales within the pharmacy market are conducted on a company share sale basis, the impact will be felt by a limited number of sellers.
Accounts & Business Administration Comment from Mr Atif Butt – Hutchings Accountants
In terms of pharmacy sales it is largely business as usual, although for any sales that are taking place as the current pandemic continues to develop, it will be important to understand the implications of additional government/NHS support taken in this time, and for any legal, employment or taxation issues that arise to be duly considered when preparing the sale agreement. For this reason it is more important than ever to make sure you get pharmacy specialist legal and accounting advice. Also for any sales that are currently taking place it is vitally important for pharmacies to stay on top of their administration and paperwork and make sure they get their HMRC and NHS submissions made in time, so they can manage their cash flow and also report to the purchasers and keep the sale on track to complete. As pharmacies are at the frontline of the response to COVID-19 and therefore under enormous pressure, this can be challenging at the present time. Hutchings Accountants can assist with business administration tasks such as VAT and payroll if required.
Lenders & Finance Brokers Comment from Mr David Brewer – Managing Director of FTA Finance
Buyers are looking to still make long-term decisions and we are taking the view that the current climate will be a temporary measure that whilst it may disturb the performance of a business for a period of time there will be no impact on the long-term success of the sector. The situation with the banks is in a state of flux as they support existing clients, however, as we come through Covid-19 we would expect there to be clear mandate from the Government to stimulate growth across the UK. Given that healthcare, and pharmacy in particular, is a low risk sector we would expect to see Bank funding support for future purchases to continue. Taking all these factors into consideration we are confident that there will still be a significant demand for pharmacy business as we approach quarter 3 of 2020 and accelerate further as we move towards 2021.
For the here and now the news remains positive in that the Banks ARE still lending to the profession with purchase completions taking place in line with original timescales and approval continuing to be obtained for new funding proposals. Timescales for obtaining new funding ‘sanctions’ are taking slightly longer than normal and it is vital more than ever to approach the dedicated business development teams at the Banks for the most positive and pro-active results.
As at time of writing it good news in that we have not seen any changes to Bank lending policy and pricing towards the Pharmacy sector. Lending criteria continues to vary widely from Bank to Bank with cash deposit requirements for first time buyers ranging from 10% to 25% and loan margins from as low as 2% up to 5% over base rate. This again shows the benefit of working with an independent broker who knows exactly who to approach and can help negotiate to obtain most flexible and competitive terms.
Outlook for the Pharmacy Sales Market
The primary importance for people is to ensure that they and their loved ones remain healthy in this crisis. Going forwards what is certain is that we will pull through this, restrictions will be lifted and normality will once again return to pharmacy and life generally. The unprecedented nature of the COVID 19 crisis must however underline to Government, the importance of a stable, well provisioned National Health Service and the vital contribution that Pharmacy provides to the community overall as part of the NHS. Whilst GP practices have been able to close their doors to patients, pharmacies have not had that luxury and contractors all across the UK, and their staff, have faithfully stepped up to the front lines alongside the staff in the NHS, in order that communities can safely access vital medications and receive reassuring face to face professional advice and support at a time of great fear and anguish. We hope that this will be recognised and that adequate Government financial support is provided to the pharmacy sector to ensure that, should it be called upon to do so in the future there is a strong network of pharmacies available to provide support to the community.
Speaking to contractors and potential sellers throughout the sector, it is expected that a number will look to bring forwards their plan to retire, particularly if ill health is a factor in their decision. Others we are in contact with have indicated that they expect the pharmacy values to rise in the near future as the crisis has demonstrated again, just how robust pharmacy can be as a business model. Indeed one can imagine that from a lending Bank’s point of view pharmacy remains a comparatively low risk investment when compared to most businesses across the UK, and this is highlighted with the far reaching economic impact of Covid-19 seen so far around the world. The wider micro & macro-economic implications of the pandemic are of course still developing and we are not out of the woods by any stretch, but despite the considerable challenges pharmacies have faced in recent years the sector could yet again appear a relatively safe bet for investors.
Hutchings Consultants Background & Sales Team
The Firms business is that of pharmacy brokers and valuers. The pharmacies, which we sell and value and act as sales agent for, typically range from approximately £300,000 turnover for single shops, through to groups of around £100M turnover. Hutchings Consultants Ltd only deal with pharmacies and so we consider ourselves to be true experts in this field. We have many years of experience within the market and a long standing relationship since 2005 with the National Pharmacy Association. We are recommended by the NPA to its members for all matters relating to the selling and buying of pharmacy businesses, across England, Wales and Scotland.
We are currently the only NPA partner supplier to reach Platinum Status and are a household name within the market, to the extent that HMRC and similar bodies have used Hutchings articles and publications in the past as source of market intelligence for their own purposes. We carry out several hundred pharmacy valuations and sales across the UK each year, so we are familiar with the prevailing market conditions and realistic goodwill values. The company’s historic background is also in tax and accountancy, specialising in the pharmacy sector, and this additional expertise gives us a comprehensive understanding of pharmacy profitability and valuation.