Securing funding for partners to purchase a pharmacy

The independent high street pharmacy may be under increased competition from supermarket pharmacies and national chains, but it can still provide a good living and potential for the future.

Of course, as a pharmacy owner, you are a professional providing a vital service - but you are also operating a business. Although the NHS script provision will be a mainstay of your income, the real potential for your shop will come from your retail activities. Proprietary health products, cosmetics and electrical beauty will all have a large impact on your profitability. 

It means that you will need to become a professional retailer as well as a pharmacist - and you may need to invest, not just in the dispensing side of your business, but in the retail side.

Securing the funding you need to buy, fit out and stock and keep your shop afloat while you establish yourself has to be a priority - especially in the current climate. 

At Rangewell, we help practitioners throughout the medical and pharmaceutical professions find solutions to their funding needs - and we recently helped a pair of partners secure the funding they needed to take on their first pharmacy.

The challenge

Our clients were a pair of London-based pharmacists who had met while studying for their pharmacy qualifications and after a few years as employees, were now ready to start taking the next step in their careers by acquiring their first pharmacy.

“We had both been working in large chemist chains. It had given us the chance to see how the business works in the real world. You can learn most of what you need to know about becoming a dispensing pharmacist in college, but your education as a retailer only starts when you start work.  We both were interested in that side of the business, and there was certainly a lot to learn - but we both saw that the real rewards of the profession really only come when it is combined with a retail business.”

The partners saw that the simplest way to become the owners of a profitable business was to buy one.

The chemist shop has become part of the fabric of British life, and although it might be perfectly possible to set up a new shop, it is difficult to find a location where a shop is not within easy reach. For this reason, most people coming into the business prefer to take over an existing business. The chances are that it has succeeded in the past because it is in the right location for the market it serves, potential customers know that is is there - and it will probably have a list of loyal customers.

It means that buying an existing chemist shop is the simplest way to own a business that is capable of delivering both turnover and profitability from day one.

The partners lived in a London commuter town and were keen to find a business nearby. They had looked at a number of potential  acquisitions, but when a small independent chemist shop came up for sale on a busy high street in a nearby town they were certain that it was the opportunity that they had been waiting for. 

“It was a leasehold business, which would make it easier to afford - although the lease still had several years to run. It was not too far away, and most important of all, it was on a high street with plenty of passing trade.”

Looking at the accounts showed that the business was profitable. There was plenty of current retail  trade, as well as a thriving scrip business.

What’s more, there was plenty of potential in the business. The premises had a large stockroom which could be converted to provide extra sales areas, and the growth of the town meant that there should be plenty of additional customers over the next few years.

“There was another chemist in the town, but there was no big chain, which meant that we could grow the business without competition that we could not compete against. We talked to experts and to our accountant, and we were confident that we could steadily build the profits with some investment in displays and things like lighting."

The business was for sale at £625,000 and so the partners approached their bank for help.

Many first time business buyers will turn to their bank to help them get the funds they need - but not all are successful. 

High street banks should be the simplest and most cost-effective way to secure the funding required to purchase a business, especially as most lenders may consider pharmacists and pharmacy purchases as being a relatively good risk and be eager to help. However, in recent times the banks have become more reluctant to lend, particularly to people with no history of running their own business.

What’s more, funding a pharmacy purchase may require some specialist skills and knowledge of the market and the economic realities that underpin it.

“People need their pharmacy for prescriptions and they will always make more purchases when they come in. But there can be delays in payment from the NHS for prescriptions. We wanted to be careful with our borrowing.”

Changes to the way that the Government pays for dispensing medicines has caused cash flow problems for many pharmacies, especially during the pandemic. The NHS pays three months in arrears and this delay affected pharmacists’ profitability.

And to make things worse, a huge spike in prescriptions increased wholesaler bills at the same time as a rise in drug prices.

Our pharmacist clients approached us to help secure the funds to buy the business, after the bank they had initially approached were unable to provide the level of funding they needed.

The funding they needed to secure

The bank were able to make a partial offer and were prepared to advance 80% of the offer price - £500,000.

However, we saw that the straightforward approach of a loan secured on the business would not be appropriate.

Lenders are wary of first-time business owners. Despite the pharmacists' professional experience, they had not run a business before. Most lenders will take the view that this is a risk - without a history of profits from a business under the control of a borrower, there have no indication that a new venture would be a success.

The partners asked us to find a better solution for their funding needs.

We found a lender which was able to provide an 85% loan supported by a charge on the residential property owned by one of the partners. This had the disadvantage of potentially putting the residence at risk, but with his plans for the business looking sound, the partners agreed that the risk was small. 

This would provide £531,000 over 15 years at a rate of 3.25%.

The partners were able to make a contribution of £10,000 from their own savings, but this still left a considerable shortfall. We then started looking to find a way to provide the remaining 59%.

Our understanding of both the funding of pharmacies and of the lending market allowed us to find a solution quickly.

It can often be difficult to get additional funding for a new business which has already a large loan commitment, but at Rangewell we knew the solution. We could arrange revolving credit - a reserve of cash ready to be called on if required. We would arrange a rolling credit agreement with a  specialist supplier  for £60,000.

Revolving credit

Overdrafts used to be the most common form of everyday business funding.They were provided by the bank, and would let you withdraw cash that you didn’t have in your account, to use for a few days or a few weeks, as a buffer against cashflow slowdowns, or to deal with larger expenses. Your bank would only charge you for the cash you withdrew, and for the time you used it.

But when the credit crunch hit, the banks reduced or removed overdraft facilities. Revolving Credit provides an alternative reserve of funds ready to use. 

The provider offers a line of credit with a limit that is agreed when you apply. You can then call on this reserve as you wish. Like an overdraft, the facility will only mean a cost to you when you actually use the facility, based on the amount you drawdown, and the time which you hold it. You can repay at any time, and the funds will be ready for use again.

This can be a valuable additional source of small cash sums for short periods, for purposes such as buying in stock - although there are no restrictions on how you use the money.

If you want to fund growth or to deal with temporary cash flow shortfalls, it can provide the ideal solution.

Rates will vary between providers and will also depend on the level of funding agreed. Both secured and unsecured arrangements can be provided, with those arrangements secured on assets usually offering more attractive rates.

The rolling credit we arranged:

£60,000 at 1.25% per month

Our clients would be able to combine both funding sources to deliver ‘jigsaw’ funding to make up the total they needed for their business purchase.

Rolling credit has a realtively high cost, but the plan would be to pay off the amount borrowed as soon as possible - certainly in the next six months - and then maintain the facility to call on as required. The business would come complete with stock, but the rolling credit facility would offer a way to provide for new stock, refits, and even cashflow support as required.

Why Rangewell is the solution for your funding needs

The current business climate can mean that certain types of funding which may have been routine in the past are now becoming problematic.

At Rangewell, we will do our best to find the type of funding that you need and which fits your business plans, but where the approach you want is not possible we will find alternatives.

Because we are independent and can take an entrepreneurial approach to the business of lending, we can frequently help find businesses answers to funding challenges when going direct to lenders yourself will not.

We can also call on the experience of our team of business finance specialists to develop innovative solutions, and to put those solutions to work.

With our experience of the entire lending market, it means we can find the funding you need - whatever your pharmacy funding challenge.