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Scottish Pharmacy Market Update

The Current Market

Scottish pharmacies have remained in high demand through the first three quarters of 2020, bolstered by a notable number of new and first-time buyers keen to get on the ladder in this buoyant and competitive market. Group owners are particularly keen to grow and add to their existing portfolio of pharmacies. The conversations that we are holding with buyers across the sector highlight a particular focus on pharmacies located within Health Centres and the larger cities of Glasgow and Edinburgh. Fellow NPA Supplier Partner, Tom Rocks of Tom Rocks Finance has been seeing a similar desire for growth from his clients and from the key banks involved in lending to the sector; Tom comments: ‘’Pharmacy prices are healthy and buoyant across all of Scotland but the Central belt of Glasgow and Edinburgh corridor in particular.’’
Speaking directly to some of the banks, they have also reported an increased number of customers at every level of the pharmacy market. Generally, the banks we spoke to were all very positive about the future of Pharmacy in Scotland and the lending outlook. The Covid-19 pandemic has shone a spotlight on the sector, demonstrating how increasingly reliant communities are on their local pharmacies. The public is depending on the sector more than ever, as it delivers vital healthcare services at a time when accessing your GP on a face to face basis has become, in many cases, much more difficult for patients, particularly those considered high risk.

Scottish Government Remains Positive About Pharmacy

The ongoing message from the Scottish Government is that of continued support for Pharmacy as a means to remove some of the growing pressures from GP services, this is evident with the new Pharmacy First service. Although the launch of the service was postponed due to the Covid-19 outbreak, Pharmacy First has been described as the biggest change to the Community Pharmacy Contractual Framework in recent years, and the hope is that more services like this will be introduced by the Government in coming years.
An encouraging step towards this has been the temporary grant of powers to healthcare professionals to administer Flu Vaccinations during the pandemic incorporating a one-off payment of £250 for those pharmacies that participate in the flu vaccination programme.

What does the future hold for Scottish Pharmacy Sales?

With the continued support of the Scottish government granting further funding, services and permissions to their healthcare professionals, the Scottish pharmacy market looks set to remain a popular sector for both lenders and buyers alike and there are no apparent signals that competitive demand for pharmacies in Scotland will start to wain any time soon.
Unity Trust Bank (one of the key lenders in the market) further echoed our positivity with the buoyant Scottish market when we spoke to them. Scott Hutchinson, Healthcare Relationship Manager said “I have seen goodwill prices increase significantly over recent years. Demand remains high with willing buyers, many of whom are paying over valuation, and certainty in the funding model has helped to sustain price growth.”
Goodwill values remain at impressive levels compared with the rest of the UK, with prices ranging between 150 to 200 pence in pound for the most sought-after pharmacies in popular regions. Typically, the principle method used in valuing pharmacy is a multiple of the business EBITDA (or net profit following certain adjustments). For central Scotland this would range from anywhere between 10x to 12x, in certain cases even higher.
When compared with the English and Welsh markets one would typically expect to see an EBITDA ranging between 6x to 8x pence in the pound being the market barometer. This significant difference is a key indicator as to the strength of the Scottish pharmacy market and is a direct result of the high demand levels.

Breakdown of Scottish Pharmacy Owners

The table below demonstrates that overall, the number of pharmacies in Scotland has remained consistent in recent years with just a handful of new contracts being granted.

Outlook for Taxation

Hutchings Consultants have the added benefit of our in-house pharmacy accountancy and tax experts, Hutchings Accountants.

In the last budget, the Government changed the favourable relief scheme for sellers, Entrepreneurs Relief (ER) to Business Asset Disposal Relief (BADR), and at the same time 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. 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.

What Factors Can Affect Pharmacy Valuation?

Some of the key aspects that will help and contribute towards a seller achieving a higher goodwill value when they come to sell are:

  • Having the right balance of income streams – ideally for high street or community based pharmacy businesses, income should be predominantly NHS, rely on a spread of surgeries and have limited income from nursing or care homes and drug addicts – ideally less than 20%.
  • Having room to grow – if you have maximised every possible opportunity for growth in the business then you leave nothing for an incoming owner to improve on. This can sometimes be a turn off for potential purchasers who may be looking to add value and make their own mark on the business.
  • Reasonable overheads – if you have committed to high property expenses, staff or maintenance contracts  this takes profitability away from yourself and any new owners pocket and leaves them with the task of trying to address these matters where possible, which can be costly and time consuming.
  • Being in the right location – size of the local patient & customer base, potential for growth, good transport facilities, minimal pharmacy competition and distance from G.P surgeries are some of the many factors considered by potential buyers when evaluating a potential pharmacy acquisition.
  • Profit margins – you need to be able to present the business in
  • its best possible light showing a strong margin and a good bottom line. There are many different ways in which your accountant might present your figures, all of which could be fine for tax purposes but its important that consideration is given to how they appear to would-be buyers and that the true profitability is clear to see.

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