Designed to provide an insight on current trends and influences in the pharmacy sales market, the report covers topics such as buyer activity, funding, goodwill prices, profit margins and market predictions for the coming year. For sellers, be sure to read about our new market leading Help to Sell Scheme which reduces the financial risk associated with a sale.
Those with an interest in the pharmacy market will be interested to learn that despite the many challenges posed by the pandemic, activity from buyers remains high and confidence in acquiring has improved significantly throughout the last year.
Author; Paul Steet
Senior Pharmacy Consultant, Hutchings Consultants
The last 12 months has presented tumultuous challenges to the pharmacy sector, which has risen admirably and resolutely to meet them. Pharmacy contractors and their teams have been at the forefront of fighting the pandemic dispensing over 1 billion items whilst facing unprecedented workload pressures including increased demand from patients for face to face consultations, staff illness due to COVID and ensuring adequate safety measures are in place within the pharmacy to name but a few.
During this period pharmacy teams have engaged enthusiastically and played a pivotal role in helping protect the nation’s health as evidenced by the rise to 2.6 million flu vaccinations given in 2020/2021 compared to 1.7 million administered in 2019/2020.The Government, having finally recognised the important contribution made by pharmacy to the immunisation programme, has stated publicly the intention to approve 400 pharmacy based COVID 19 vaccination centres. So far over 1.7 million COVID vaccinations have been administered by pharmacy led centres which is a credit to the profession’s ability to support the NHS at this crucial time.
Questions still remain around government funding for the sector particularly repayment of the £370m COVID Advance Payment which is currently in negotiation with the PSNC.However, the addition of a new Advanced Service for COVID 19 Lateral Flow Distribution is a positive signal in light of the recent decommissioning of Medicine Use Reviews.
Although there have been some teething problems with incoming referrals, 94% of pharmacies are now registered to provide the NHS Community Pharmacist Consultation Service which has seen over 200,000 patients so far. Ninety percent of whom have received assistance without the need for onward referral, thereby alleviating pressure on other parts of the NHS.
In spite of work place pressures, those in a position to sell or buy a pharmacy have continued at pace as throughout this last year the pharmacy sales market has remained very active with buyer demand outstripping the supply of pharmacies for sale. Having completed the large-scale disposal of lower item volume pharmacies by various multinationals and large groups, a corner appears to have been turned and a number of groups are now focused on acquisitions once more. Avicenna’s purchase of the 57 shop Dudley Taylor Group, Well’s acquisition of the 6 shop Pharma Z Group and PCT Healthcare’s merger with Murrays Pharmacies creating a 150 branch group is just some of the market activity to hit the headlines over recent months. However, there may be further significant pharmacy disposals to come as both Lloyds and Pharmacy 2U are reported to have appointed bankers to explore sale options due to a change in respective fortunes during the pandemic.
Pharmacy buyers have been active and we have experienced a large increase in demand across all buyer categories. In the 12 months to March 2021 we saw a staggering 56.9% increase in new buyer registrations compared to the same period the previous year. As with recent years the new registrations have been principally led by enthusiastic first time buyers, however we have also seen an increase in other categories of buyers such as investors and existing pharmacy owners looking to add to their portfolios.
Overall, for many new buyers a combination of stability offered in the CPCF and the pharmacy sectors crucial role in providing healthcare during the pandemic has bolstered confidence in acquiring suitable opportunities as they arise.
Whilst eager first time buyers have been very active, we have also seen strong demand from some small and medium sized group owners who have been strategically buying as suitable opportunities have arisen. Many of these buyers are prepared to pay a premium price for a pharmacy if it is a cohesive fit for their growing group. As the leading pharmacy sales agent we speak to a wide range of buyers every day which has enabled us to identify opportunities to agree sales ‘off market’ in complete confidence. By engaging prospective buyers in a targeted approach they are reminded of the risk of missing out on the purchase to another buyer should they be reluctant to place their best offer for the pharmacy business.
For any pharmacy owners contemplating selling privately, the benefit of using an experienced pharmacy specialist agent will ensure you achieve full market value for your business and are supported throughout the transaction. Whether through a broader marketing strategy seeking to generate competitive bids, or through a targeted approach to a well rated and financially qualified buyer, it will enable a seller to strike a deal at the best price and terms at a time when there is increased competition between buyers.
The unprecedented impact of the pandemic and a desire to support their pharmacy colleagues has meant many owners who otherwise would have sold in the last year have had to place their plans on hold. Furthermore the large scale disposal of pharmacies by the multi nationals appears to have run its course for the time being, which in turn has also contributed to a reduction in pharmacies coming onto the market, during an active period when demand has increased rapidly. This imbalance in supply and demand has led to an encouraging improvement in average goodwill prices attained by those in a position to sell as demonstrated in the table.
Whilst there remains some way to go before average prices recover to levels seen during 2019 the current lack of pharmacies provides would be sellers with a good opportunity to achieve favourable terms on their sale. As demonstrated in the graph below the number of offers per sale has recently reduced slightly as we have chosen to specifically target potential buyers who have identified themselves to us as incredibly keen to acquire in that location and can demonstrate they have the necessary funding to complete the deal. As mentioned, this strategy of a targeted approach has the potential to achieve a premium price whilst reducing the risk of confidentiality breach.
EBITDA (Earnings before Interest, tax, depreciation and amortisation) is the most crucial figure in assessing the goodwill value of any pharmacy. Following a wave of sales in 2019 & early 2020 which had a higher proportion of smaller turnover pharmacies, many of which were loss making or barely profitable, buyers often reverted to making an offer based on ‘Pence in Pound’ methodology which had the effect of increasing the average EBITDA multiple. This year a higher percentage of more profitable pharmacies have been sold, reducing the average multiple statistic as buyers shift their valuation weighting back toward EBITDA from Pence in the Pound.’
Gross Profit Margin is a useful business performance benchmarker of interest to both sellers and buyers alike. Despite the wide range of challenges faced by contractors in the last 12 months there has been a notable increase in the average Gross Profit Percentage Margin data as evidenced in the table below.
Due to a variety of reasons, whilst some pharmacies around the country have experienced downward pressure on their margins, many have seen an increase so far this year which is a strong indicator of the time and hard work contractors have invested in their business. It is testament to the dedication and professionalism of the sector which, during the pandemic has had to contend with drug supply issues whilst also bearing the financial cost of dispensing some loss making medicines.
For some contractors there are still ongoing adjustments required in their business to move more in line with the service led CPCF but it is hoped that this focus on margin can be maintained over the coming year as this should reap dividends, particularly for those considering a sale in the near future.
Whilst a small percentage of pharmacy sales proceed on a cash purchase basis the majority of buyers continue to rely on bank lending and in the last 12 months there has been a shift in lending requirements for those seeking funding. Banks are generally demanding higher levels of deposit as well as greater financial insight on the target business. It is fairly commonplace now to receive a request for additional business information such as up to date management accounts for example. Buyers are also required to undertake more in-depth due diligence and produce sound business plan proposals to support their funding applications which are heavily analysed by bank credit teams.
For those sellers operating on a leasehold basis another consideration which has been cropping up more recently among lenders is the requirement for a longer remaining term on the length of the lease. This doesn’t always apply and may depend on the individual circumstances at the time. Overall banks remain keen to support pharmacy buyers in their acquisitions which isn’t unexpected given that pharmacy has been one of the few sectors to continue trading with any certainty through this turbulent period.
‘2020 was a year like no other and will be etched into our memories forever. Remarkably the pharmacy sales market was broadly unaffected and goodwill values have held up well due to the increased demand primarily from first time buyers. Most pharmacy purchases completed as expected in Q3 and Q4 of 2020 and this has continued into the first quarter of 2021 with few delays or issues linked to Covid-19.
The demand from first time buyers has been driven by their poor experience during the first lockdown in 2020. A sizable number were furloughed and those who were self-employed struggled to access Government grants and loans – this experience has been a key driver for pharmacists to secure their long term future through pharmacy ownership.
It is heartening to see the banks still actively supporting the pharmacy profession. Funding remains available for acquiring pharmacies and bank appointed valuers are mostly supporting the goodwill values calculated by Hutchings. Pharmacy has long been a green light sector for the banking profession and even in the current economic climate it continues to be so.
The pharmacy sales market has remained extremely robust since the start of the pandemic buoyed both by an increased demand from buyers keen to acquire in a sector which has performed outstandingly well under difficult trading conditions and banks continued desire to lend. Despite on-going Government funding uncertainty, workload pressures and competition from internet-based pharmacies, buyers of all types have a growing desire to invest in their future through pharmacy business acquisition.
As we hopefully return to some normality in our lives and the wider economic outlook starts to improve, we anticipate an increase in the number of pharmacies coming onto the market as owners take the opportunity to move forwards with their business and retirement plans. It is unknown at this stage if any rumoured large-scale disposal of pharmacy chains such as Lloyds will affect the market but any rapid increase in the volume of pharmacies available to the general market could potentially impact Goodwill sale prices. In the immediate short term, whilst the lack of quality pharmacies for sale continues, we anticipate a further stabilisation if not a further increase in goodwill values. Those pharmacy owners considering a sale would be wise to consider taking advantage of the current conditions in order to maximise their sale price through either targeted off-market disposals or a competitive offer tender process.
Atif Butt (ACCA)
You may think you will qualify for Business Asset Disposal Relief (formerly known as Entrepreneur’s Relief) when you sell the shares in your pharmacy, meaning you only pay 10% tax on the gain you make when certain conditions are met. However there are circumstances where you may not qualify for the relief, for example when you are trading through a limited company which also owns other assets besides the pharmacy or has a high level of cash at the point of sale.
If you think any of this could apply to you, make sure you identify the problem and take action before you sell your pharmacy to ensure you qualify for this valuable relief. If you would like us to look at this for you then please send us a copy of your latest accounts which we can review and tell you if we identify any issues. All information you send to us is, as always, treated in the strictest confidence.
In last year’s budget, the Government changed the name of the relief from Entrepreneur’s Relief to Business Asset Disposal Relief (BADR), and reduced the lifetime limit from £10M to £1M, meaning the relief is now only available on the first million pounds of gains on the sale of your pharmacy.
Following the COVID-19 lockdown the Chancellor has admitted that the UK is grappling with something that is unprecedented. With the UK having to borrow hundreds of billions the Chancellor will need to find ways of raising revenue. The Chancellor has commissioned a review on capital gains tax, which is an obvious choice for change as it is currently charged at lower rates than income tax. It is possible that the government will introduce further changes to the relief, or they may abolish it completely. To put this in perspective, under current legislation if you made a gain of £1m on the sale of your pharmacy and you qualified for BADR you would only expect to pay tax of £100K (10%). However, if the relief is scrapped your tax bill could soar.
If you are thinking of selling your pharmacy but haven’t decided when, it’s worth bearing in mind that ER may not be around forever and your tax bill could double without it.
The Chancellor announced an increase in the main corporation tax rate from 19 to 25 percent with effect from 1 April 2023. However, the 19 percent rate will continue to apply to companies with profits of not more than £50,000, with marginal relief for profits of up to £250,000. The Government notes that this will remain the lowest rate in the G7.
Another surprise announcement in the last budget was the introduction of a new super-deduction of 130% for qualifying capital expenditure. This new measure is only temporarily being introduced for two years for expenditure from 1 April 2021 to 31 March 2023. This will allow a 130% deduction for investments which would normally qualify for 18% plant and machinery writing down allowances. The new rules also allow for a first year allowance of 50% on special rate pool expenditure (which normally only attracts 6% writing down allowances).
There has also been an extension of loss relief carry-back to 3 years from the previous one year limit. As the rate of corporation tax is set to rise over the coming years, with increased capital allowances and an extension of loss relief carry back, it’s advisable to see if there is an opportunity to reduce your corporation tax liability and maybe even get a corporation tax refund!
Since April 2019 most VAT registered businesses in the UK have been required to submit their VAT returns and details of their sales and purchases using MTD compliant software. For many businesses, this has meant a move away from desktop or manual systems and onto cloud based accounting software. From 6th April 2021 there is a further requirement for businesses to have in place digital links between all parts of their MTD compatible software.
If you haven’t made the move already, consider acting now. With the right advice and support, switching to a compliant cloud based accounting system can provide many benefits to your business, allowing you to get better quality accounting information with less effort and at a lower cost.
In 2017 HMRC announced major changes to the IR35 regulations affecting the use of self-employed and non-permanent workers in the public sector and indicated that these changes were likely to be rolled out to the private sector next. Whereas it was previously for the contractor to decide their employment status and tax arrangements, from April 2021 it is now the responsibility of the client to determine this and deduct the appropriate taxes, unless they qualify as a small company. This will affect pharmacy businesses who use locums and don’t qualify as small companies.
If you use contractors or self-employed workers in your business, e.g. locums, it’s a good idea to confirm tax and national insurance is being accounted for correctly, and take specialist advice where necessary.
All in all, selling your pharmacy business is likely to be the biggest financial transaction you will ever undertake, and the tax implications can vary depending on your individual circumstances. If you’re thinking of selling it’s very important to take specialist professional advice at an early stage, so you can understand the factors affecting the value of your pharmacy and structure your sale tax efficiently to make sure you take advantages of all available reliefs and deductions. In fact the earlier you look at this, the more opportunities there are to improve your pharmacy value before sale and pay less tax when you do sell.
Hutchings Accountants are specialists in pharmacy sales, with many years’ experience helping business owners grow their pharmacy’s potential and prepare for sale. Our advice has helped clients save hundreds of thousands of pounds in tax, walking away from their sales with considerably more money in their pockets.
This new unique service allows you to market and sell your pharmacy without paying any agency, accountancy or legal fees until your sale has completed. Never before have pharmacy industry experts teamed up to provide a 360°degree service for the sale of your pharmacy, all on a no sale no fee basis.
This scheme removes all of the risk from you when approaching the market and provides total clarity as to the fees you will pay on successful completion, before you start. If for any reason your pharmacy does not sell, you will not be liable to any agent’s, accountant’s, or solicitor’s fees. Furthermore, utilising our in-house expertise, and that of our pharmacy specialist legal partners Clarke Mairs LLP and accounting partner Hutchings Accountants, we will ensure your pharmacy is in the best possible shape to achieve the maximum market value, while simultaneously mitigating almost every foreseeable hold up, reducing your stress levels and letting you focus on running your business.