If you're a pharmacy owner who is considering selling, refinancing at a better rate or purchasing another pharmacy, it is crucial to maximise the value of your existing business. Various factors can affect its value, some of which are beyond your control. However, this article will focus on the financial aspects you can influence to enhance your pharmacy’s profitability and overall worth.
The starting point is to establish the current market value of your business. A pharmacy sales agent can assist you with this. Going forward, this should be updated annually to help you monitor any fluctuations or improvements in the value.
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Implementing a robust financial management system is also crucial. This will consist of a computerised bookkeeping system with data input by a skilled professional. In our experience of conducting valuations, we often encounter financial figures that are incorrect, such as erroneous VAT returns and management accounts. To address this, consider having a bookkeeper or accountant set up the system, handle data input and provide you with key figures and reports on a monthly basis. This way, you can utilise your time both working in and on the business more effectively.
Using financial information to improve performance?
Once you have the necessary financial information, you can leverage it to help improve business performance by:
- accurately measuring your performance. Ask your accountant to benchmark your business against other pharmacies to assess how well you are doing
- monitoring and controlling your costs. Take a close look at your expenses and identify areas where you can effectively manage and reduce costs
- forecasting and budgeting for forthcoming expenditure
- tracking progress. If you have set goals such as increasing your gross margin, you can monitor the effectiveness of your efforts through your monthly financial data.
You can also use this information to explore “what if” scenarios. For example, what if:
- I increase my over-the-counter (OTC) sales by 10% next year. How much will my gross and net profit increase?
- I increase my NHS items by 7%. How much will my gross and net profit increase?
- I reduce my staff costs by 5%?
- I let the spare room at the back of the pharmacy to a chiropodist?
Key areas for business review
Gross profit
You should know from your accounts what your gross profit margin is. However, not all accountants use the same format to calculate this. The standard and accepted method for calculating the gross profit of pharmacy businesses can be illustrated in the following example:
Your pharmacy's sales£800,000
Less cost of sales
Opening stock -£38,000
Purchases £545,000
-£583,000
Less closing stock
Closing stock £39,000 +£39,000
=£256,000
Leaving you with a 32% gross profit
To benchmark your business against other pharmacies, you need to compare like with like. Therefore, it is important to calculate your gross profit in the same way as in my example. You should not have any other items in the calculation, such as locum costs, stock-taking fees, or other sundry costs.
Now that you have your gross profit figure, do you have any idea how it compares with other pharmacies? Is your pharmacy underperforming by industry standards? Is there scope to improve your margin?
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For example, on a £1 million turnover, an increase of 2% to your gross margin would give you an extra £20,000 per annum in profit and could increase the value of your business by over £100,000 when you come to sell.
Stock
Are you carrying too much stock? If so, this can lead to financial inefficiencies and reduced profitability.
Property
If your pharmacy operates from leasehold premises, ensure that the lease meets criteria that maximises the business value. Check if the lease is under the Landlord and Tenant Act 1954. This provides security of tenure for the tenant giving a right to renewal when the lease expires.
If it’s not under the Landlord and Tenant Act 1954, determine the remaining lease term. Selling a business with less than 10 years on the lease can be challenging and will lead to a reduced sale price. In these cases, try and negotiate a lease that falls under the Landlord and Tenant Act 1954.
Even if the lease is under the Landlord and Tenant Act 1954, consider renewing it before selling if it only has a few years remaining. Buyers, especially first-time buyers, often require a lease duration aligned with their bank funding, typically around 15 years. Banks enforce this requirement to mitigate lending risks.
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Staffing costs – This is usually the largest business cost for pharmacy owners. It is important to get this cost at the right level to boost your profitability and value. If you carry out a review and think there is room to reduce staff hours the options are:
- Wait for staff members to leave. This may be because they wish to retire or find another job, etc. This may turn into a long-term strategy.
- Consider reducing the hours of existing staff. For example, a reduction of just 20 hours per week in staff wages at a rate of £11 per hour would result in an annual saving of just over £11,000. When you sell the business, this could add another £70,000 or £80,000 to the selling price.
- The other alternative is to make staff redundant but this is always a difficult decision to make.
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In conclusion, by conducting a comprehensive financial review of your pharmacy business, you can uncover potential issues, identify areas for improvement and increase its profitability and value. Every pound saved in costs has the potential to increase the value of your pharmacy by up to £7. So, take the necessary steps today to maximise your pharmacy’s worth.
Anne Hutchings is managing director of Hutchings Consultants Ltd – pharmacy sales and valuations