Acquiring your first pharmacy marks a significant milestone, but it demands careful assessment before diving in. From analysing financial records to projecting future plans, each step is vital in gauging the pharmacy's true value. By working through these essential steps, you'll gain valuable insights into your prospective venture's financial landscape, ensuring a smooth transition into ownership.

You need to review the available financial information so you can understand how profitable the business is; forecast your plans for the business so you can work out what changes you want to make; look at their financial implications; understand how the purchase will be structured; secure additional financing for the purchase where required; and have a good idea of how much money you’ll need to pay and when, so you can finally take ownership of your first pharmacy!

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Looking at all of this in detail before you commit to the purchase will give you a good idea of what the pharmacy is truly worth and ensure no nasty and unexpected surprises rear their head after you’ve made an offer for the business.

 

Step one: reviewing the business’ financial records

 

Let’s start by talking about the first step - reviewing the financial records of the business you are considering purchasing. Once you have had an offer accepted, you will need to look into the company history in a lot more detail, but at this stage it makes sense to request copies of the most recent financial reports for the business to make sure everything ties up. This will normally be provided by the seller as part of a financial pack, and the type of information we would look at would be:

• Monthly NHS statements
• VAT returns
• Company accounts and tax returns
• Management accounts

Having this information allows us to cross check it and make sure the numbers all tally up, so you can have confidence in the figures you’re presented with.

To help with this process, we will usually ask for additional information about the business, such as:

• Split of turnover between the NHS, OTC, services etc.
• Details of staff roles and rates
• Lease terms
• Local competition
• What’s happening in the area that could affect the value, positively or negatively

This allows us to build up a more thorough picture of the business’ performance and profitability and lets us drill down to analyse this in much more detail than the headline figures. For example, we can look at how the demand for certain services has changed over time, or how the gross profit has been affected.

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A key concept to understand here is the business’s Gross Profit Margin. This is calculated by taking the total income and deducting the cost of your drug purchases to get your gross profit, and then dividing this by your turnover and multiplying by 100 to get a percentage.

So, if your total income was £500,000 and you had drug costs of £340,000 your gross profit would be £160,000 and it would give us a gross profit margin of 32%.

The average gross profit margin for UK pharmacies was around 32%, but rising costs over the last year or so have seen this start to fall for many.

 

Step two: understanding your financial implications

 

All of this is immensely helpful when it comes to our next step, forecasting your plans for the business and translating them into numbers so you can understand the financial implications. If you are aiming to get a loan to help finance your purchase, a lender will usually require you to prepare a business plan and financial forecast for your first two or three years of ownership. After all, they want to make sure you will be able to keep up with the loan payments.  

But in any case, before making an offer it makes sense to check your plans are financially viable, and that as well as paying off the taxman and your loan payments, there’s going to be enough left over for you to pay yourself for all your hard work!

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You will need to think about what changes you plan to make to your income and expenses, and particularly how they could affect the following areas:

• NHS dispensing item numbers and prescribing income
• Services income
• Over-the-counter (OTC) income
• Other income like rental income
• Drug purchasing costs
• Any changes to staff/locum levels and costs 
• Any changes to other overheads and expenses
• Capital expenditure, e.g. any new equipment you plan to buy or store refits
• Your drawings or how much you plan to draw from the business for your living expenses
• Any other factors that will affect your cash flow in the first year

Once we have this information, we can prepare a monthly profit and loss forecast showing the money we expect to have coming in and going out each month.

As well as showing us if the business is going to profitable and generate enough money to cover our loan repayments and personal drawings, this will also give us a clearer view of the businesses cashflow, which will be particularly important in the first few months of operations.

One of the most enjoyable parts of our work with independent community pharmacies is helping our clients navigate the exciting journey of buying a new pharmacy. But before making an offer, it’s essential to understand the business and what it is worth.

 

Atif Butt (FCCA) is senior accountant at Hutchings Accountants Ltd