Buying a pharmacy
As part of our partnership with Scottish Pharmacy magazine and www.scottishpharmacist.co.uk, here is the latest article outlining the factors to consider when buying a pharmacy.
When purchasing a pharmacy there are many factors to consider, including:
• making sure you are purchasing the right pharmacy for you
• putting finance in place to make the purchase
• the structure of the purchase is the best for you
• the timing of purchase payments are appropriate
• due diligence is carried out on the target pharmacy business
• the purchase contract offers you appropriate protection
Finding the right pharmacy
The first step is to find the right pharmacy to purchase. You do not want to expend the effort and financial resources to purchase a pharmacy only to find it is not what you thought or hoped, and ultimately turns out to be unsuccessful. Buying the wrong pharmacy can be an expensive mistake.
Key aspects to consider include:
• Underlying profitability and financial KPIs such as Gross Profit Margin and EBITDA. Analysis of these financial measures allow you to satisfy yourself that you are purchasing a sufficiently profitable business
• The local population demographic. Older people or families with young children may be more likely to require services
• Competition – is the area the pharmacy is located over-saturated with pharmacies, making it difficult to compete for custom?
• Is there potential for population increase in the area? For example, new build homes, expanding towns putting in a greater infrastructure to attract more people to live there. This could signal an impending increase in potential customer base
• Proximity to a GP
Finance
Most purchases will be financed by some form of third-party lending, most commonly a bank loan.
Taking on external financing will require careful consideration as to the affordability of this for the pharmacy business. Cashflow projections should be prepared based on forecasted profitability of the target business, accounting for the time lag of NHS payments, potential outlays in the early stages after purchase, such as taking on additional staff, a shop refurb etc. The cashflow projection should build in the loan repayments to ensure the business can support these and the lender will seek to stress test the underlying figures.
Traditionally, loans are often secured against tangible assets such as property, however in the pharmacy industry this is less common with loans ordinarily being secured by a floating charge over the company. This essentially means the loan is unsecured, with the bank lending against the future cashflows from the NHS contract. In some circumstances a personal guarantee may be required by the Director for a percentage of the amount borrowed depending on the specific circumstances. Taking on finance the business cannot afford could result in default and loss of the business itself or personal assets to facilitate repayment.
Ensuring the structure of the deal is appropriate for you is a crucial part of the purchase process.
Asset vs Share purchase
An important aspect of the deal structure is whether the purchase will take the form of an asset purchase or a share purchase (note: if the target pharmacy business is not in the form of a limited company an asset purchase is the only option here).
With an asset purchase you are buying the business (goodwill) and its assets (stock, fixtures, vehicles, potentially the pharmacy building or the building lease). Considerations for you as the buyer with an asset purchase include TUPE rules for employees of the business and transfer of the NHS contract.
With a share purchase you are buying the company that operates the pharmacy. This can be beneficial from an administrative point of view as all employee contracts, supplier agreements, insurances etc. continue post-purchase. The ownership of the company, and thus the pharmacy, has changed but its operations can continue uninterrupted. Something to consider with a share purchase, however, is that by purchasing the company you are also purchasing its history. This means there is no ‘clean slate’ when you purchase the pharmacy business, so you are liable for any issues arising post-purchase, even if they relate to a time or event before you were owner. Your solicitor should build protection into the Sale and Purchase Agreement in the form of warranties against any historic issues coming to light post-completion.
There are tax consequences to consider as both options have pros and cons. Often it is down to the specific circumstances of the parties involved which will determine the most advantageous purchase type. You should consult with your accountant and solicitor to determine the most beneficial route for your prospective purchase.
The purchase process itself can be lengthy with multiple stages to pass through before completing the purchase.
Initial terms
An agreement in principle, known as Heads of Terms (HoT), will be signed by the prospective buyer and seller as a show of good faith that both are committed to the potential transaction. The HoT will set out the intended purchase price as agreed by the parties, as well as the structure of the deal and the timing and amount of payments. Signing HoT does not commit you to the purchase nor does it lock in the price or structure, it does however allow the process to move forward centred around a generally agreed deal, subject to change should any material issues arise during due diligence.
Due diligence
Due diligence will typically be carried out on three fronts – financial, legal and operational. Financial will be led by your accountant, who will forensically analyse the target pharmacy business accounts, management accounts and other financial records to ensure that you are buying what you think you are buying from a financial standpoint. Your solicitor will deal with the legal due diligence, analysing contracts that the business is entered in to with other parties. Operational may be initiated by your solicitor but it is likely that you will play a role in this yourself, liaising with the prospective seller to establish all aspects of the pharmacy businesses operations.
Sale and Purchase Agreement
Following conclusion of due diligence, so long as no ‘skeletons in the closet’ have been discovered, or if they have then purchase price has been adjusted accordingly to reflect, drafting of the Sale and Purchase Agreement (SPA) will commence. This is essentially the purchase contract and predominantly takes place between the buyer’s and seller’s legal representatives with your solicitor liaising with you and your accountant as necessary.
If you would like to know more about buying a pharmacy, please email us at info@thomsoncooper.com.
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Scott Wilson – Qualified Accountant
Scott is our Accounts Department Senior Manager who specialises in Management Accounting and Corporate Finance. He advises business owners on how their business is performing, identifying areas of potential growth as well as areas of concern. He also has experience in both the buy-side and sell-side of business acquisitions and disposals, covering all aspects from business valuation to the due diligence process.