The Current Market
Undisputedly, in a very short space of time, the COVID19 pandemic has created tumultuous challenges across the whole of the United Kingdom, particularly in respect of the provision of healthcare. Pharmacy teams throughout the UK have been at the forefront of continuing to care for patients under both difficult and risky operating conditions. The arrival of the virus and the resultant Government instructed lockdown has created a significantly different trading environment compared to that seen prior to this period which has led to many contractors, who may be considering selling, asking how the pharmacy sales market in Wales has been affected?
Even through lockdown, and in line with both the England & Scotland pharmacy sales markets, Hutchings Consultants have continued to experience both a positive and continuing demand from a wide range of buyers including First Time Buyers, individual owners and previous owners who have sold, in addition to current owners seeking to add to their existing portfolios as and when the right opportunities arise. We have also continued to experience interest in pharmacies from buyers across the UK, most notably First Time Buyers and even Investors from outside of the sector who recognise the relative stability that pharmacy businesses offer.
“Hutchings Consultants have continued to experience both a positive and continuing demand from a wide range of buyers”
Most independent regional group owners have remained in the market, albeit taking a much more considered and strategic approach to the opportunities they choose to look at. As for the large Multi-nationals, following a particularly quiet period in terms of buying activity over the last few years (as most sought to consolidate trading positions and reduce operational costs) one or two are beginning to show some early signs that they are considering acquiring again, although this is yet to result in any submission of offers at this point in time.
Buyers who require Bank borrowing are generally finding the level of support for the pharmacy sector has continued unabated from lenders though we understand that Bank credit and underwriting teams are reviewing loan applications and business plan proposals more stringently to ensure that there is sufficient capacity to cover all borrowing repayments adequately. Coupled with unprecedented demand for Covid related grants and borrowing from other business sectors there has inevitably been a resultant increase in the time taken to process loan applications which has had a knock on effect to sale completion timescales. Looking forwards, we hope to see an improvement in Banks performance as more staff return to operational duties.
Gross Profit Margins in Wales, a useful bench-marker for Pharmacy contractors, have been fairly consistent since 2017 at around 33%, despite a fall to 29.5% seen in 2018. However, in more recent business valuations we have undertaken, a notable trend was a dip in margin performance to around 28%. The main reason cited for this reduction has been significant drug pricing and supply issues encountered over the last 12 months, together with a number of incidents of loss making dispensing on specific items, overall placing financial pressure on contractors. The COVID 19 pandemic has exacerbated this situation further due to increased demand and subsequent wholesale prices which have created well-publicised cash flow issues for many pharmacies. This has been alleviated to an extent by the recent Advance Payment made which will ultimately be clawed back. As a result of this many have decided to place a greater emphasis going forwards on researching and securing more favourable purchasing arrangements from existing or new suppliers wherever possible.
The table below shows the consistency seen in average yearly figures since 2017 but does not reflect the more recent valuations we have conducted.
Wales Goodwill Prices
In comparison to pharmacies over the border in England, Welsh pharmacies have achieved higher Pence in Pound values in recent years, owing to the perceived greater support for the sector by the Welsh Government. Despite this Goodwill values have come under pressure, however we have seen an encouraging slight increase in the Pence in Pound value achieved for sales completed and agreed in 2020 so far. This increase may be partly attributed to the limited supply of available pharmacies for sale in Wales in comparison to that seen over previous years, but it is also reassuring that in the majority of sales conducted, we have seen multiple buyers bidding which has helped sustain the current values. Our recommendation to any seller keen to secure a buyer is to set a realistic initial asking price in order to encourage early interest from the market. Once initial interest is generated, it is often possible to command a higher price through competitive bids to secure the opportunity.
Although Community Pharmacy Funding settlements in recent years have fallen below expectations the announcement made by the Welsh Government on the 16th June 2020, injecting an additional £18.3 million to the global sum over the next three years, is a positive signal of intent in these turbulent times. The Government has set out a clear long term strategy for the future to integrate the sector more closely with hospitals and Primary Care as an overall healthcare package offering to the population. The implementation of the Common Ailments Service and push to increase the number of Independent Pharmacist Prescribers for example, demonstrates a continuing commitment to the sector which provides encouragement to many potential buyers who are considering buying a pharmacy in Wales.
Without doubt the COVID-19 Pandemic has created what is hoped to be short term funding, trading and operational issues but overall pharmacy has shown what a resilient business model it is in comparison to many other parts of the economy which have ceased trading altogether during the period of lockdown. Indeed, we have seen this evidenced in the increased number of investors registering to buy in the last few months who have turned their attention to healthcare as a way of minimising risk in their overall investment strategy. Whilst we are yet to see the full economic and social impact of this pandemic, Banks have confidence in the sector as an investable proposition which again should provide encouragement to buyers.
It is extremely difficult to predict medium to long term pharmacy values but in the short term we expect Pence in Pound values to remain largely steady, with an outlying possibility of a slight upward pressure felt, due to the combined ‘Covid effect’ and less supply of pharmacies for sale. Recent events have shown the importance of pharmacy as a key component in the effective provision of healthcare to the nation which it is hoped will continue to be reflected in future funding decisions for years to come.
Maximising Your Goodwill Value
The key aspects that will help and contribute towards a seller achieving a higher goodwill value when they come to sell are;
- Being in the right turnover range – if your business covers the middle ground of the market, with a turnover between around £700,000 – £1,250,000 which is at a level that is accessible to both first time buyers and yet attractive to larger group operators the more competitive bids you are likely to see.
- Having the right balance of income streams – ideally your pharmacy business income should be predominantly NHS, rely on a spread of surgeries and have limited income from nursing or care homes and drug addicts.
- 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 be viewed as a negative by most potential purchasers who will want 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 future profitability away from a new owners pocket and leaves them with the task of trying to address these matters where possible which can be costly and unattractive.
- 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 business opportunity.
- 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.
You may think you qualify for Entrepreneur’s Relief (ER) meaning that you will only pay 10% tax on the gain you make when you sell your pharmacy. However, there are circumstances when you may not qualify for ER, for example, when you are trading through a limited company which has other assets or investments besides the pharmacy. If you think this could apply to you, make sure you identify the problem and take action before you sell your pharmacy to ensure you qualify for ER.
If you would like us to look at this for you then please send us a copy of your latest accounts which we can study and then tell you if we identify any issues. All information you send to us is, as always, treated in the strictest confidence.
ER has been costing the Government billions, which is signifi cantly more than the few hundred million that was initially budgeted for. In the last few years there’s been much speculation about the future of ER with many organisations calling on the Government to either abolish or scale down this tax relief.
In the last budget, the Government changed the name of ER to Business Asset Disposal Relief (BADR), and reduced the lifetime limit from £10M to £1M, meaning the relief is now only available on the fi rst million pounds of gains on the sale of your pharmacy.
It is possible that the government will introduce further changes to the relief or that 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 ER is scrapped your tax bill could soar.
Breakdown of Welsh Pharmacy
As demonstrated by the table below, there has been a 1% reduction in the overall number of pharmacies since 2017. The pharmacy closures have been fairly evenly divided between the large National Multiples and smaller Independent contractors.
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.