Pharmacy

Are you ready to own a pharmacy?

With the pharmacy sales market remaining buoyant and the banks maintaining a healthy appetite to lend to pharmacists, 2018 is proving to be a good year so far for transactions.

A recent report by Christie & Co noted that sales activity in the first quarter of 2018 was up by 31% and enquiries from those looking to buy were up by 18% compared to the same period last year.

Here are some questions and pointers if you are considering a purchase:

Why are you buying? Seems like a straightforward question but you will probably be surprised to hear that a good number of people who begin the process do not actually end up buying. You should set yourself clear objectives as this will provide you with the motivation to get over the hurdles that will come your way throughout the process.

Are you financially ready? The initial purchase is a significant investment alongside the first year running costs and any refits or upgrades to fixtures and fittings you wish to make. Determine your budget early and what cash you will need for working capital and renovations. Knowledge of your own resources from your Accounts and what might be available from a lender will be key to purchase negotiations and paying the right price for the pharmacy. If a property is included in the assets being acquired, then get a surveyor involved too.

What type of pharmacy are looking to buy? Think about the size and location of the pharmacy. Are you looking to manage the pharmacy yourself or employ people to manage and run it for you? What level of return do you require? It’s best to decide on these factors early as it will ensure that you don’t waste time on looking at potential purchases that don’t meet your requirements. You will also need to examine the thoroughness of the vendor’s valuation model and the credentials of the preparer. 

Get up to speed on the potential hurdles you will face. A lot of this depends on whether the pharmacy-owning company and its share capital is for sale or whether an asset sale is taking place. The latter may include the premises, NHS contract, goodwill and stock. There are pros and cons to both routes, not least in terms of tax and price, and it is vital that these are clarified as early as possible.

Warranties and indemnities are a typical feature of Sale & Purchase Agreements (SPAs) for pharmacies. A warranty may be included stating that there have been no claims against the business. An indemnity clause often included in SPAs might state that the seller must bear any costs incurred by unresolved litigation against the pharmacy business after completion. Your solicitor will seek clarity on both so there are no nasty surprises later on.

The SPA should address a range of issues, including;

• · It will ensure that information about the business, including its Accounts, is reliable. It is essential to view up-to-date Management Accounts for the pharmacy you wish to buy as the financial health of a pharmacy may have deteriorated since the Annual Statutory Accounts were produced.
• · It will also ensure that you can rely on prescription volume and other services by obtaining NHS statements for the last three years.
• · Damaged/old stock should be excluded from the valuation which should be carried out by an external valuer.
• · Links with local doctors’ surgeries and residential/nursing homes.
• · Third-party pharmacy and GP relocations.
• · On purchasing a company, you inherit its liabilities and therefore care needs to be taken to negotiate the necessary warranties and indemnities from the seller to protect your interests.
• · Restrict the seller from directly competing with you after completion.
• · Property issues such as transfer of ownership, lease provisions, planning consents and repairs.
• · Equipment specifications, age, insurance and any software contracts.
• · All employee information (pay rates, benefits, pensions, holidays, etc.) must be disclosed so that the buyer knows what the responsibilities are going forward under the Transfer of Undertakings (Protection of Employment) regulations (TUPE).
• · Locum and other supplier relationships

Raising finance to fund the purchase

If you are involving a lender in the pharmacy acquisition, make sure that you deal with representatives that specialise in Healthcare. All the main banks have specialist Healthcare teams and your solicitor should advise you on the loan agreement obligations such as security over assets. You should also ask your accountant to prepare financial projections for three years both for the bank’s requirements and to see how the new pharmacy will fit into your existing financial modelling.

Seek professional advice early

This article does not constitute legal advice and does not obviate the need to obtain specific legal advice or other relevant professional advice relating to your specific circumstances. However, with careful planning and sound guidance, you can reduce the stress associated with the pharmacy purchase and concentrate on making your business a success.

If you are ready to buy or sell, get in touch and I’ll talk you through the process so that you are fully aware of what’s involved, the time it could take and the costs.

This article was first published in Scottish Pharmacist June 2018

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Growing the pharmacy profits: align your strategy with the opportunities for growth

During 2013-18, overall dispensing chemists’ revenue in the UK is anticipated to increase at a compound annual rate of 1.5% according to the report published by IBIS World at the end of 2017.

The forecasted growth is mainly being attributed to an ageing population and the increasing prevalence of diseases such as obesity and associated health ailments. The rising popularity of electronic prescription services and the development of direct contracts with drug manufacturers have also underpinned growth.  However, despite this, pharmacists are coming under pricing pressure due to regulatory changes, decreasing NHS budgets, the loss of patent protection and increasing competition.

Economic and political uncertainty, which is impacting all industries in the UK, is likely to continue to constrain growth as consumers opt for low-margin generic prescription drugs over high-margin branded products. Regulation and continued cuts to NHS funding are expected to limit growth. Further, low-cost generic drugs will continue to flood the market as pharmaceutical patents expire, aggregating downward pricing pressure.

With competition from supermarkets and with online-only retailers such as Amazon poised to enter the market, the importance of having a clear business strategy and marketing plan for the pharmacy is vital.

Identifying the key opportunities for growth should be your starting point: an ageing population; increasing health consciousness in the general population; rising NHS prescription volumes; demand for services such as vaccinations and new products such as biological and biosimilar medicine are also forecast to increase.

Here are some questions to consider as part of your planning process. The answers to which will help you to develop your strategy.

• · How close is your establishment to the nearest GP surgery? How does this affect demand?
• · How do you ensure your pharmacy is easily accessible? How late are your opening hours?
• · How have supermarkets in your area affected your business recently? How will you differentiate your services from those offered by supermarkets/Amazon?
• · How will you alter your product portfolio to cater for an ageing population and health consciousness in the wider public?
• · Are you accurately managing stock?
• · What software and business applications are you using to run and manage finances?
• · How do you hire and retain qualified staff? Are you providing staff training to deal with elderly customers, millennials, time-pressed working parents?

If you would like to discuss further, get in touch and I’ll help you to progress your business and financial strategy for the year ahead.

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Managing the pharmacy finances

If you have recently opened a new pharmacy, taken over a pharmacy, or have been running one for a while and would like to get a better handle on the finances, this month’s insights are for you.

Getting to grips with the books
In today’s world with everyday life becoming more digital and interactive, managing your accounts and tax is no different. The online cloud accounting environment is growing exponentially with a range of programs, add-on’s and apps available to assist you in streamlining your pharmacy business and its operations.

The flexibility of use, ease of information available and all-round slicker delivery puts cloud software miles ahead of the more traditional desktop versions and endless spreadsheets.

Cloud accounting systems can be accessed anywhere (the pharmacy, at home, on a train or even on the beach if you can’t switch off…) and simple tasks like creating and sending invoices, matching payments and reconciling your bank can be done by a few clicks on your smartphone or tablet. You should speak to you accountant about the best package and apps for your pharmacy.

Ensuring that you have the bookkeeping in hand is often overlooked when setting up and growing the pharmacy (especially if you have little financial knowledge) but this is one of the key controls that should be implemented from the outset – either completed internally or by engaging a bookkeeper.

Compliance
Running a pharmacy brings with it a certain amount of compliance in terms of the accounts and tax. Company accounts require to be submitted to Companies House within 9 months of each financial year end. HMRC also require payment of Corporation Tax in the same 9 month period. Your accountant will generally prepare and submit these on your behalf.

Your accountant should also meet with you to develop your tax planning strategy taking into account your business, personal and family circumstances – it’s never too early to consider inheritance tax (IHT) and creating a tax plan for your life (and beyond). Decisions made during your working life can leave your loved ones with a larger IHT bill than may have been necessary.

Further HMRC compliance is also required in relation to PAYE/NI and VAT on a regular basis. The government’s directive that all companies offer workplace pensions brings an additional compliance burden upon pharmacy owners both from a financial and admin perspective.

Managing cash and controlling costs
Cash flow will be the biggest challenge when opening a new pharmacy. Unless you are in the fortunate position of having a significant amount of capital to invest, managing the cash position of the pharmacy could be the main task as the pharmacy grows.

Some suppliers may not offer you favourable credit terms in the early stages until you build up a payment history with them. So, it is important that cash movements are forecasted as much as possible to ensure that the pharmacy is operating within its means.

Review costs on a regular basis to ensure that you are not overspending and look for areas where you can actively reduce costs – all this will go towards effective cash management.

Ideally, you should be thinking at least 6 months ahead in terms of operational activity and planning to ensure that all cash commitments can be met in line with expected sales etc. It is also worth considering a ‘safe’ balance in your pharmacy i.e. what is the level of cash to be retained at any one time. This safe balance should be enough to cover short term commitments like payroll should activity not go as planned.

Measuring performance
It’s important for pharmacists to understand the numbers side of the business so that they can gauge whether or not they are making good returns. As with all retail businesses, pharmacy owners need to recognise and be alert to trends and learn when to make changes to their operations and strategies.

NHS income should be monitored monthly and will highlight whether the pharmacy’s volume is expanding or contracting. There will be certain trends in, for example, the winter months. It is also useful to look at the sales to payroll ratio and your gross profit %. The latter measure reflects the % of every £1 of sales that is available to cover your overheads, interest and depreciation.

Return on assets / capital employed – are all of your assets supporting sales? Your premises, IT equipment and in-store furniture should all be supporting sales. This measure calculates what return you are generating from the assets and capital you have invested in the business. You should set a target each year and measure progress against it.

And finally, taking the regular temperature of your pharmacy’s financial health is a must, especially if you are looking to raise external funding. Lenders will look at a range of financial criteria to determine whether or not you have a stable business and to assess your ability to repay. The Quick Ratio is used to determine how many times the pharmacy can immediately cover its liabilities and is an indicator of the pharmacy’s financial stability. The measure is calculated by dividing your total current assets by total current liabilities.

Your accountant should be reviewing these and a few additional key measures with you on a regular basis. If you choose to go with one of the cloud accounting packages, a great deal of the above is automatically calculated and graphically presented thereby enabling you to keep an eye on the pharmacy’s key numbers, trends and, ultimately, your business success.

This article was first published in Scottish Pharmacist October 2017.

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