A Guide to Buying a Pharmacy Business: First Time Buyers
Buying a pharmacy is a big decision that warrants a unique financial approach
Buying a pharmacy is a big decision. Potentially, pharmacies provide a stable investment opportunity with lucrative returns and relative security as a result of societal needs.
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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.
Making the decision 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 particulars of financing a 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.
Making the right decision
Buying a pharmacy is often represented as a ‘once in a lifetime' opportunity for pharmacists who may already be working as a manager or locum. The decision to purchase one should not be made due to a fear you will not be able to do so in the future.
It may be better for you from a financial and wellbeing sense to simply continue in your role - which is why you need to consider what you actually want in buying the pharmacy and understand that it will impact your working hours, financial commitments and responsibilities. You’ll need to follow a process that involves assessing your own willingness/capabilities, identifying the pharmacies available, utilising the valuation process and finally, working with lenders to secure funding.
When buying a pharmacy, you become accountable for its profit and must ensure it has enough cash flow to pay outgoings as a minimum. This is in addition to perhaps the most vital question: how will you fund your purchase?
Dedicated Sales Agents can help, guiding you through the buying process and showing you potential pharmacies. You may have to sign a confidentiality agreement in order to gain access to certain information about the pharmacies you’re looking at.
Browsing potential pharmacies
An independent pharmacy for sale should be able to issue the last three years of their annual accounts as well as the FP34 statements for the last 12 months. The FP34 statement deals specifically in NHS income, while the annual accounts will help you understand the profits/losses of the business and get an idea of its trajectory, so you can make the best decision about whether this is the right pharmacy sale for you.
Crucially, this information will be used by lenders when assessing funding options - so when browsing the market remember that you don’t just need to find a pharmacy that you think looks profitable, it also has to look like a good investment to the lender.
You’ll want to look at the following aspects when you’re browsing pharmacies:
- Location - how close is the pharmacy to a GP? Is there a lot of footfall in the area?
- Competition - are there many pharmacies nearby? What sort of structure do these competitors have?
- Dispensing base - does the pharmacy already have a good customer base you can build on?
- OTC sales - does the pharmacy do well in regards to over the counter medications as well as NHS prescriptions? Some pharmacies may be very lucrative if they have strong OTC opportunities.
- New services - can you add value to the pharmacy by adding services such as smoking cessation consultations, emergency contraception etc?
- Medical Use Reviews (MURS) - does the pharmacy offer MUR trays or can you add them?
- Technology - does the pharmacy have modern technology or will you need to invest in it?
- Employees & hours - what sort of skills does the current employee mix have? Are there strengths and weaknesses? Will you need to hire new staff? What kind of opening hours does the pharmacy currently operate and will you be able to change these?
- Lease - does the pharmacy business own the building it's situated in? If not, how long is left on the lease? A short lease can make securing finance a challenge.
Involve your accountant
If you don’t have a background in finance, bring in your accountant to assess these documents and help you forecast the potential of the investment. An account will also be able to help you draw up detailed business plans through years one, three and five - as well as identifying the costs associated with pharmacy equipment, refurbishment and improvements you might need to make. Ultimately this gives you a profitability projection you can take to lenders.
Securing lender interest
Once you’ve decided on the pharmacy of your choice, you need to show that you have lender support for your offer. You’ll need to assess the lender market or use a broker like Rangewell to do it for you. Once you have some lenders in mind, you can begin approaching them and they’ll request information about you and your finances to determine what their offer will be.
The information they look for is about ascertaining the viability of their investment. If they fund you, will you have the experience/qualifications/knowledge to make it a stable investment? This means looking at your qualifications, your own capital contribution, your experience in the pharmacy and/or management sectors, your financial profile and background assets and information about the pharmacy itself.
Once they have this, lenders will be able to determine their offer of support. You can use this in combination with your accountant’s support to submit a full offer to the pharmacy itself. Sales agents will generally be able to help you assess the level of interest in the pharmacy and to adjust your offer accordingly. As popular investments, often business owners will sell a pharmacy for more than their asking price.
Remember: lenders are primarily concerned with the safety of their investments. Sometimes this can mean a first-time buyer of a pharmacy may be viewed as a risk - which is why it’s important to use a broker who can help you make your application as strong as possible and help a lender see the benefits you bring to the table.
Rangewell will assess the entire market of lenders - not just the high street banks. We have great relationships across the commercial property market and can help lenders see your application from the most beneficial angle. We’ll work with you to provide professional advice, tailor your application and bring out the best of your background so the lender’s perception of risk is lessened and you have a better chance of securing favourable funding options.
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 fewer creditors - which means all assets and liabilities come to you.
Pharmacy 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, but 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 the 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 and 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 like 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 team. 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.
Reducing capital investment
Work with Rangewell and we’ll go to lenders on your behalf to make your application as strong as possible. In doing so, we’ll look at your current assets and try to find offers that either minimise your cash investment or offer beneficial rates for those willing to put significant deposits into their 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 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 to each party. Completion happens either 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. 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.
Buying a pharmacy with Rangewell
So now you know how to buy your first pharmacy. While the steps in this guide may vary, the main elements are doing research, securing funding with a specialised loan for pharmacists, and having a strong business plan. However, many people who want to buy a pharmacy overlook the importance of third-party lenders and specialist financing teams who may be able to help you in a more suitable fashion than a high street bank.
To get the most value from these lenders, you need a broker partner that can represent your goals and background in a way that reduces your perceived risk and helps you secure the best terms and funding package for your project.
For first time operators looking to take a step up in their pharmacy careers and begin reaping the profits available for running successful pharmacies, Rangewell can help provide specialist assistance for your financing decisions without any cost to you.
If you’d like to explore the idea, why not get in touch for a no-obligation chat? Even if you’re not currently considering a pharmacy purchase but doing research for the future, or you are looking for any type of business loan for pharmacy, you never know how achievable it may be for you to leverage existing assets such as buy-to-let properties to secure funding options without the need for large stores of cash capital.
Get in touch today to learn more.
Glossary of key terms
- Over the Counter (OTC)
Items sold by your pharmacy which are not NHS prescriptions. This can vary immensely between pharmacies - some may perform very well in OTC sales.
- Community Pharmacy Assurance Framework (CPAF)
A toolkit by NHS Primary Care Commissioning that assists Local Area Teams in assessing compliance and quality.
- Emergency Hormonal Contraception (EHC)
Free emergency hormonal contraception which may be provided at the pharmacy.
- FP34 statements
NHS statement which shows the breakdown of NHS income
- Local Area Team
Regional body of the NHS which administers the contract. This used to be known as the Primary Care Trust, or PCT.
- NHS License
The NHS license is evidenced only by the inclusion of a pharmacy on the Pharmaceutical list maintained by NHS England. There is no NHS license document/contract.
- Medicines Use Review (MUR)
A key part of the NHS Community Pharmacy Contractual Framework.
- New Medicine Services
Assured services which are added to the community Pharmacy Assurance Framework
- Sales and Purchase Agreement (SPA)
An agreement that transfers the entire issued share capital or the business and assets of a sole trader or partnership.
- Transfer of Undertakings Protection of Employment (TUPE)
A part of employment law which applies during business mergers or acquisitions. A TUPE measures letter must summarise the intentions of the purchase in relation to current employees of the seller - such as opening hours and policies/remuneration.