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Buying a pharmacy is a huge commitment with many pitfalls for the unwary.
Below is an article written by Anne Hutchings for Chemist and Druggist. These are reproduced here for your information
and guidance.
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A step on the retail ladder |
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Surround yourself with good advisors
Your financial team should include a solicitor, accountant and banker. In
addition you may decide to enlist the support of other professionals such
as, an independent financial advisor, pharmaceutical wholesaler etc. Whoever
you choose make sure that they have the necessary knowledge and experience
in the pharmacy market to be able to give you the support and help which you
will need in your new venture.
Tip: When choosing an accountant, or solicitor, ask them to provide
references from some of their clients who are independent pharmacists.
It’s good to talk
Speak to as many people as you can such as stocktakers, wholesalers, the NPA
etc, their wealth of knowledge will give you a good feel for the current
market. Speak to friends and colleagues who run their own pharmacies.
Tip: The quickest way to success is to learn from those who have already
done it!
Don't pay over the odds
A large part of the purchase price will be for the goodwill. Valuing
goodwill is difficult and never more so in the current market with the cloud
hanging over contract limitation.
You will need to decide what a particular pharmacy is worth to you and this
may not be the same as the vendors asking price. When considering a pharmacy
you will typically look at:
 | The location of the pharmacy, potential for growth, customer base,
competition, location of doctors surgeries, split of NHS and OTC etc. |
| The financial side of the business - This is the area which I will
concentrate on in this article. |
Establish exactly what you are buying
For example, are you just acquiring business assets such as goodwill,
fixtures, fittings, equipment and stock, or is the vendor trading through a
limited company and expecting you to purchase the company? Even if the
vendor is trading through a company he does not have to sell the company you
could just acquire the assets of the business without the company. However,
it is likely that the vendor will want to sell the company particularly if
it just consists of one pharmacy.
There are some disadvantages in acquiring the vendors limited company. You
will not just acquire the business assets but also the business liabilities.
Some of the liabilities will be fairly easy to determine such as current
creditors i.e. money owed to suppliers, outstanding PAYE, HP arrangements
etc. Unfortunately you will also become liable for any past liabilities
which may not surface until after you have purchased the company.
For example, let us assume that PAYE on employees wages has not been
properly accounted for in the past and the Revenue discover this after you
have taken over the company this will be a liability of the company. There
could be a VAT irregularity and the company has claimed too much VAT in the
past again this will still be the liability of your new company. These are
just a couple of examples but there could be other instances where a debt
from the past suddenly surfaces.
Tip: If you intend to purchase the vendors company engage the services of
an experienced solicitor who will include all the necessary indemnities in
your purchase agreement which will at least provide you with some legal
recourse should an unforeseen liability occur after you have bought the
company. Your accountant should also be involved in this procedure and
liaise with the solicitor.
Extra work extra fees
Of course all this additional work involved in buying the vendors company
will result in extra professional fees.
Tip: Try and negotiate a reduced price with the vendor to allow for these
additional fees, after all if the vendor is insistent on selling the
company it is probably because he has been advised that this will be most
tax effective for him in some cases his tax saving could be massive, so
the scope for negotiation may be significant.
Buyer Beware
The vendor will naturally want to present the business in the best possible
light and may not point out problem areas of the business. There have also
been cases of unscrupulous sellers who have deliberately misled purchasers.
So buyer beware do not assume that the business accounts or information
presented to you represents the whole picture.
Essential financial information
You should ask the vendor to supply the following information:
| The last three years accounts for the business |
| Copies of the Vat returns for the last 12 months. |
| Copies of the last 12 months PPA statements. |
| Up to date management accounts if available. |
Also check the stock which you will be purchasing, is it obsolete, or
slow moving stock?
Tip:Ask your accountant to examine all the financial information you have
obtained and to explain it to you. It is worth spending some time at this
stage it could stop you making a big mistake.
Look carefully at:
| Turnover and gross profit margin over the last three years, how does
this compare with the current trading figures of the business? |
| The stock levels as represented in the past accounts and how these
compare with current stock levels. |
| Look at the business expenses, such as staffing costs, are these
adequate or is the shop overstaffed? Has the vendor been staffing the shop
with family members who are underpaid for their work, suggesting that the
true staffing bill may be higher thus reducing the net profits. |
| If you are acquiring leasehold premises look at the terms and rent
reviews. |
Can you make a decent living?
Overall you should be satisfied that you can make a decent living from the
business. If a pharmacy is too small you may find it difficult to make much
more than you would by working for someone else. When you consider the long
hours needed to run your own business plus the stress you should ask
yourself if it is worth it. Of course if you find a small pharmacy with huge
potential this may make all the effort worthwhile.
Tip: Small pharmacies with turnovers under £400,000 are generally less
attractive to potential purchasers because the profit potential is limited
and consequently they will probably be more difficult to sell in the
future.
Impress the bankers
Once you have found a suitable pharmacy you will need to present all the
financial details including your own business plan and cash flow forecasts
to your financial backers. Usually this will be your bank. A well presented
package will stand you in good stead so you should enlist the assistance of
your accountant for this purpose.
Tip: It can be tempting to cut costs and prepare the financial forecasts
yourself, but unless you have good accounting knowledge and experience get
your accountant to help you with this. Your bank manager will not be very
impressed if the figures are not presented properly and this will
undermine your credibility.
At this time you will also need to think about how you will operate your new
business i.e. as a sole trader, partnership or limited company. We can advise you on all these issues. For an initial discussion please call us on 01494 722224.
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