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How much is my pharmacy worth?

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How much is my pharmacy worth?

Selling a pharmacy can be a minefield but help is at hand in a new book from pharmacy sales expert Anne Hutchings. In the second of 12 monthly extracts, Anne looks at the factors that determine how a pharmacy is valued by buyers

If you are selling a pharmacy, the value of your business will be based on its profitability. The banks will value your business, and the buyer will make an offer, based on the latest set of accounts and up-to-date trading figures, so ensure you have these available.

A key figure from the accounts is EBITDA – earnings before interest, tax, depreciation and amortization. When calculating a value for the business, lenders will typically take a multiple of the EBITDA (usually around five to seven-fold). Profitability apart, there are other factors that impact on the value of a business. Location is obviously important.

For example, a pharmacy in a health centre or next door to a GP surgery would generally expect to command a higher price. Pharmacies in some parts of the UK are more sought after than others. Businesses in places such as Cornwall may struggle to sell because there is simply not the demand.

On the other hand, London and the Home Counties are areas in which businesses are highly sought after. Any threat to the viability of a business will affect its value. Areas in England where a lot of 100-hour contracts have been granted have become less desirable. Similarly, GP relocation can adversely affect the value of a pharmacy in that area and limit the interest of potential buyers.

Staff costs

A major factor affecting a valuation is staff costs, particularly if these are higher than the norm. Wages impact on net profit, and if a pharmacy is overstaffed this will reduce its sale value. Owners are often aware of the situation but don’t do anything about it. A typical attitude is that it is something the new owner can sort out. That may be the case, but new owners do not want to begin their tenure by making people redundant. It is costly, time-consuming and will affect the relationship between staff and the new management.

So if you are thinking of selling in the next few years, have a good look at your staff costs. High rents, unreasonable terms in the lease, or leases which are not renewable, will affect the value of a pharmacy. Buyers need security of tenure and will be looking for a lease with at least 10 years left that is renewable at the end of the term. If you have a lease which is not renewable you may not be able to find a buyer.

Care homes

The value of your pharmacy may be affected if a substantial part of the dispensing business comes from care homes. As a general guide, if more than 10 per cent of your NHS items are from homes this will depress a valuation. Business to homes can easily be lost when ownership changes. I still occasionally encounter pharmacies, usually in city centres, with a high OTC turnover. A business that has a counter business higher than the 10 per cent norm will see this reflected in its valuation, since it may not be sustainable.

The banks also tend to tighten their lending criteria for pharmacies with more than 25 per cent counter trade. Many pharmacies now recognise some wholesale or internet business in their turnover. Often it is difficult to separate this from the traditional pharmacy business, and this can cause problems with a valuation.

My experience is that buyers don’t want to pay for wholesaling activity, so ask your accountant to prepare a simple but separate profit and loss account for any wholesale and internet business. If a pharmacy is open for more than 55 hours a week this starts to have a negative effect on any valuation due to its higher costs, which will reflect on the bottom line profits.

An exception to this rule is London where longer hours are expected and accepted. A 100-hour pharmacy is an extreme example. Providing they are profitable they can be sold, however such a business is worth considerably less than one with a standard hours contract. As a rough guide, 100-hour pharmacies tend to achieve market values of around 50-80 per cent of standard hours pharmacies.

 

Anne Hutchings has been dealing with community pharmacists for over 20 years and has built up her company, Hutchings Consultants, to be the UK’s largest independent pharmacy sales agency. ‘Selling your pharmacy for all it’s worth’ (£12) can be ordered from Amazon (ISBN 9781784622411) or from Hutchings Consultants. For a free copy (while stocks last) complete the form online at hutchings-pharmacysales. com or send a cheque for £12 (payable to Hutchings Consultants) to Hutchings Consultants Ltd, Maple House, 53-55 Woodside Road, Amersham, Bucks HP6 6AA.

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