How do I value my pharmacy business?

By Nick Austen and Ed Gardiner-Hill ick.austen@vertexlaw.co.uk/egh@vertexlaw.co.uk tel: 0870 084 4018 & 0870 084 4016

Vertex Laws Nick Austen and Ed Gardiner-Hill, solicitors specialising in the buying and selling of pharmacies, have asked Anne Hutchings of Hutchings Consultants, the only pharmacy sales agents to be approved by the NPA, to look at how pharmacy businesses are valued.
Nick and Ed have previously looked at how to prepare your pharmacy for sale and what to expect during the sale process but clearly one of the most important questions for a pharmacist looking to sell their business is how much it is worth. What are you selling? The first thing to consider is what you are actually selling. Most of the price paid for the business will be for the goodwill. Usually the fixtures and fittings are of negligible value. Generally, if your premises are leasehold it is unusual for a buyer to pay a premium for the lease. If you own the freehold of the premises you may wish to include this in the sale at market value or create a lease at a market rent. For freehold premises I would recommend you obtain a market valuation from a local independent commercial valuer. How do I value goodwill? Pence in the pound I have lost count of the number of pharmacists who have asked me how much in the pound are pharmacies going for at the moment. It is not possible to accurately value pharmacies based on pence in the pound. You can, however, use this with caution as a general guide providing your pharmacy ticks certain boxes. The following table gives an indication of goodwill values currently being achieved. Pharmacy turnover Up to 250,000 250,000 - 500,000 500,000 - 750,000 750,000 - 1,000,000 1,000,000 plus
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The above table is only a rough guide and should not be used in place of a formal valuation. The highest price Hutchings achieved last year was 190% of turnover but this was for an exceptional pharmacy and is not the norm. Traditional valuation methods A traditional valuation method is based on a multiple of the net (true) business profit. This is profit after deducting trading expenses and making adjustments for exceptional items, such as depreciation, and adding any additional expenditure, which a new owner may reasonably incur. The current average sale price based for a pharmacy on this formula is currently around eight times the adjusted net profit. Example Pharmacy turnover Gross profit Adjusted net profit Goodwill value (based adjusted net profit) 1,000,000 300,000 130,000 1,040,000

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There are various factors which will affect the valuation making it higher or lower than the eight times formula mentioned above. Some of these are: Factors resulting in a lower valuation Turnover Smaller pharmacies with a turnover of less than about 400,000. If dispensing is low and counter relatively high. A typical independent is likely to have an 80/20 NHS/counter split. If instead the business had, for example, a

Value as % of turnover 30-50% 50-70% 70-90% 80-100% 90-150%

Dispensing/counter split

50/50 split this could influence the valuation. Nursing income home If this accounts for more than about 10% of your turnover. There are two main issues with nursing homes: firstly there is no guarantee that the new owner of the pharmacy will be able to keep the nursing home(s) so there could be a loss of income. Secondly, a lot of pharmacists dont want to deal with homes. Many buyers are reluctant to take on a business which is open for 60 hours or more a week. If your pharmacy is situated in an area where there is a possibility of a 100 hour pharmacy opening up this can have a negative effect on the price. Some geographical locations, such as fairly remote coastal locations, are just not in great demand. If your local doctors are planning on moving away this will have a negative effect.

Quality Information

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An information pack should be provided to include: Up-to-date trading accounts, and past accounts demonstrating a solid trading history. The last 12 months NHS statements. The last 12 months copies of VAT returns. Copy of the lease of the premises if applicable.

Sellers Market The current market for pharmacies is a sellers market. We achieve around six serious offers for every pharmacy that we sell. With this level of competition it is impossible for anyone to place a precise valuation on a business. If you wish to achieve the top value in the current market the only way to do this is by introducing competitive bids from buyers, which means marketing your pharmacy properly. In sale negotiations one party will tend to be in control. If you dont take control you can be sure that the buyer will! One way to ensure that you are in control of the sale of your pharmacy is to have a choice of buyers. We often come across circumstances where pharmacy owners have received an unsolicited offer either from their locum or a multiple and they want to have a valuation to make sure that they are getting the right price. Remember that if you are looking for the best price you should be looking for healthy competition between a number of buyers. In one recent case we sold a pharmacy for 29% more than the top offer from the original buyer. If a buyer has approached you privately before accepting their offer I suggest that you put the pharmacy on the open market and establish the true value. This can be done very discreetly whilst maintaining confidentiality. You may be pleasantly surprised by how much your pharmacy is worth. Vertex Law specialises in providing legal services to business clients. It is based at 39 Kings Hill Avenue, Kings Hill, Kent ME19 4SD. Visit www.vertexlaw.co.uk for information or contact Nick Austen on nick.austen@vertexlaw.co.uk or Ed Gardiner-Hill on egh@vertexlaw.co.uk, 0870 084 4040. Hutchings Consultants are specialist pharmacy transfer agents operating throughout the UK and based at Maple House, 53-55 Woodside Road, Amersham, Bucks HP6 6AA. Visit www.hutchingspharmacy-sales.com for information or contact Anne Hutchings on anne@hutchings-pharmacy-sales.com, 01494 722224.

Trading hours

Location

Security of doctors

Factors resulting in a higher valuation Turnover Pharmacies with a turnover of 700,000 plus are highly desirable to group and multiple buyers. Dispensing Nursing Homes Security income of Buyers like a high NHS turnover. Preferably none. A buyer will be looking to protect their investment. They will carry out their due diligence with regard to your local doctors, competitors and proposals for future development in the area. For example, health centre pharmacies are currently in great demand and selling for substantial sums. A pharmacy with potential to develop and increase trade is more attractive than a business that has reached its full capacity.

Potential

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