First-Time Buyers Buying a pharmacy
Buying a chemist is a big decision that warrants a unique financial approach.
Potentially, pharmacies provide a stable investment opportunity with lucrative returns and relative security as a result of societal needs.
Billions of prescriptions were issued during 2020/21 due to the COVID-19 pandemic, and 75% of pharmacy sales were to new buyers who looked to secure a more stable future for themselves following furloughs and uncertainties. However, like any investment, buying a pharmacy can be risky, and if you don’t do the right research about the pharmacy sector, you may lose out.
Deciding to buy a pharmacy in the first place requires careful consideration and planning. You must assess the market at large, the opportunity you’ve been presented with and the financial particulars of the pharmacy.
With that in mind, there are some key stages you’ll need to move through in order to make your decision and be as informed as possible. In this complete guide, we’ll help you understand every aspect of buying a pharmacy and help you stay in the know about the tricky finances that can be involved.
Head of terms agreement
You’ll now be able to ask your legal advisor to set out a head of terms agreement, which essentially stops the seller from negotiating with other third parties and outlines the main parts of an agreement. It gives you exclusivity for a period of time which you can use to do more research, such as asking local surgeries and residential homes about the pharmacy.
Submitting a share or asset purchase
Pharmacies are sold in two distinct structures, which will affect your offer as they have significant cost differences. Once you have lender support, you can submit an offer (though this is not the same as final lender approval).
When submitting your offer, the choice between asset and share purchases is down to the way the pharmacy is being sold. They differ as outlined below:
In an asset purchase, you’ll acquire all of the goodwill, fixtures, stock and even fittings in a pharmacy. This is standard when purchasing a pharmacy in a sole trader or simple partnership status. It also applies to some limited companies, as the assets of the limited company will be transferred to the buyer’s company. You do not acquire the existing liabilities of the business unless stated in an agreement. Most asset purchases require less due diligence, which may reduce your legal costs.
Business contracts will be assigned to the purchaser, and third part consent might be required. The NHS license has to undergo a change of ownership which may take up to 3 months.
In a share purchase, you’ll be buying shares in a company – which incurs its own complexities with regard to professional fees. Buying shares means you take on the goodwill, stock, fixtures and fittings, as well as any debtors and bank account balance less creditors – which means all assets and liabilities come to you.
Due diligence is more in-depth for share purchase and therefore comes with increased legal costs. However, share purchases cut out the need to wait for NHS license transfers.
The level of due diligence done for your pharmacy purchase may vary. Still, we would always recommend working with advisors who can assess all areas of the business, including assets and liabilities and identify dangers/risks. This means assessing areas such as:
- Three full years of audited accounts with full disclosure of profits and loss.
- NHS contracts – how many they hold and any other information
- P34 schedule of payments and detailed Prescription Item report – this can be useful for identifying pharmacies with a strong dispensing base.
- Category M clawbacks and their impact of them on future turnover
- Regulatory issues and compliance
- Staff contracts, salaries and any other resourcing matters
- Insurance – what is currently in place and any past or potential claims
- Leases and rental agreements in place on the property
- Book values of fixtures, fittings and assets
- Stock valuation
Due diligence can begin anytime from the acceptance of an offer – though it becomes more imperative once your lender’s funding is approved. A solicitor will assess the factors above and may also pay attention to specific areas, such as submitting a Due Diligence letter to the seller’s legal team that has extensive questions aimed at finding out as much as possible about the pharmacy.
Remember: due diligence, no matter how lengthy, is a critical process that will protect your investment and give a lender confidence. Until a contract has been exchanged, the sale is not complete. Therefore, any issues uncovered during due diligence may ‘save’ you from buying a pharmacy that could become a liability.
Like any limited company, you need a strong business plan when buying a pharmacy so you can support your finance application and appear as favourable as possible to lenders. Beyond securing funding, business plans also help you ensure that the pharmacy is the right decision for you and your situation.
Creating a business plan for a pharmacy should include:
- Set your short, medium and long-term goals out in a clear way – is the plan to grow your business or to simply run it as is? Do you intend to purchase more pharmacies or focus solely on this one?
- Outline the changes you may make to the business – how will they impact the financial situation, and how will it impact the profitability of the business? Adding a new service or offering to your pharmacy may help increase its performance.
- Will you extend the business/relocate it? Will there be new medical centres built in the area?
- How is the current employee roster structured, and how will you work with it when you purchase the pharmacy.
- Detailed profit and loss sheet as well as cash flow forecasts. Most people use their accountants to create this, although it can be done independently. Specialist accountants that work with pharmacies will likely do the ‘best’ job in the eyes of a lender.
Including all of the information above will help result in a business plan that gives lenders more confidence in their investment. When ultimately their choice is based on the perceived risk, a robust business plan helps them see how responsible you have been about the opportunities and threats to your pharmacy purchase.
The due diligence process is what helps you arrive at a realistic valuation and will be more reliable than any indication a Sales Agent can provide. Pharmacies are traditionally valued using a pence in the pound calculation, which functions as a percentage. For example, a business with a turnover of £600,000 worth 60p in the pound would be valued at £360,000.
If due diligence has not returned any issues, a valuation is derived from a 5-7 times multiple of the net profits and any other factors of influence such as a city-centre location with high footfall etc.
Once a lender offers to fund, they will arrange an independent valuation by one of its own valuation teams. This is the most important valuation and is done to ensure that your purchase is at the correct market price and makes sense for the lender’s investment. Like in your own research, the valuer will look at factors such as competition, market rent, employee roster, financial analysis and recent sales in the area.
At this stage, you should already have lender interest, but now you must secure the funding to complete the purchase. To do this, you’ll need to provide a suite of documentation for the lender to look over. This will include:
- Full details of the pharmacy you want to purchase, including accounts, tax returns etc.
- Any available latest valuations
- The purchaser’s CV, authority to perform credit searches, three months bank statements for any and all purchasers (if buying as a group), your business plan and forecasts.
- Evidence of your cash contribution or deposit. All lenders require this, and only through negotiation can you expect to change the amount of capital you need to put into your purchase.
The final valuation will now take place – so scroll back up if you need a reminder of that process. Essentially, the lender will send their own valuer to carry out a detailed valuation and ensure you are paying close to the market value of the property.
Once that valuation is done and due diligence comes back in a satisfactory manner, both parties can draft the Sales Purchase Agreement (SPA) – the document that sets out what you are acquiring, what the rights of each party are and how the transfer of business and assets to the seller will work.
The SPA will contain warrants such as a seller warranting there are no claims or litigation against the pharmacy. It will also outline the provisions deadline with the transfer of business assets and the property itself – using standard property solicitor terms known as Standard Commercial Property Conditions (SCPCs).
If the business is acquired through an asset purchase, an NHS England change of ownership consent must be obtained while the seller is still in control of the pharmacy.
Exchanging and completion
Once negotiations are done, you’re ready to become a new pharmacy owner! Your solicitors will move to exchange and completion following negotiations. The exchange involves swapping agreed SPAs to create legal rights for each party. Completion happens either on the same day or is set for a future date.
Your lender will be notified by the solicitor and will issue the funds 48 hours before the completion. The final NHS contract transfer is dependent on NHS England updating its pharmaceutical list to reflect it – so you must ensure the completion date matches the update dates. The General Pharmacy Council (GPhC) must be informed of the change of ownership, and the superintendent pharmacist must hold a fitness to practice certificate.
Assuming all goes well with the above elements, the final transfer of funds is managed by your solicitor to the seller’s solicitor. Asset sales mean you’ll be entitled to all income and profits from the date of completion.
You’ll now be a pharmacy owner with all of the opportunities and challenges that brings. By securing the right financing package from the beginning, you’ll reduce your risks and enter your new role as well-equipped as possible.