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  • Pharmacy Valuation and Buying



    Hi everyone

    I have have been thinking to buy a pharmacy which I’ve been working at for last 5 years, as pharmacy manager/superintendent pharmacist.

    The main points to consider are:

    100 hour Pharmacy in London,

    Asking price in excess of 450K for the Goodwill, Fixtures, Fittings plus stock cost of £40K.

    1) item number: average 4,384 per month of which 2000 are weekly dossetts from weekly repeat prescriptions RA/RD batches (but not from any care homes)

    2) Turn over:

    2017: £555,613
    2016: £607,801
    2015: £677,140
    2014: £765,737

    Cost of sales:

    2017: £309,499
    2016: £317,749
    2015: £381,483
    2014: £426,785

    3) Gross profit:

    2017: £244,469, margin: 44%
    2016: £290,052, margin: 47.72%
    2015: £295,657, margin: 43.66%
    2014:£338,952

    4) Expenses including staff and pharmacists wages (Year ended 30 June):

    2017: £196,706,
    2016: £201,464 ,
    2015: 215,756
    2014: 228,524

    Net profit before taxation (excluding pharmacist wage):

    2017: £55,600
    2016: £88,588
    2015: £79,900
    2014: £110,422


    Pharmacy was doing wholesale as well until approximately 2014/2015.


    5) location: London

    6) competition:

    Prescription Items:

    Pharmacy 1: 3425
    Pharmacy 2: 7576 (100 hour pharmacy inside surgery with 21647 patients)
    Pharmacy 3: 6706
    Pharmacy 4: 4357
    Pharmacy 5: not sure
    Pharmacy 6: not sure

    7) surgeries patients list:


    Surgery 1: 10895
    Surgery 2: 21647
    Surgery 3: 8140
    Surgery 4: 2875


    8)NHS net payments from FP34 forms:

    Sept:£32486
    August: £30384
    July:£45,625
    June 2017:£26519
    May 2017: £36927
    Apr 2017: £33612

    Calculated to be: approximately £445K per year



    OTC& Shop floor sales: approximately £147000/ year

    MUR target of 400 has been achieved every year plus some NMS.

    There are some private PGDs, and locally commissioned services but not significant in value.

    Has lease of 10 years.

    Premises Exempt from Business Rates

    Rent: approximately £10,000

    Landlord: local Council

    Reason for sale: owner previously worked on Sundays at this pharmacy and in addition owns other pharmacies and has recently bought 3 more pharmacies, and wants to reduce his commitments.


    My Questions:



    1) Considering the above points, is the asking price a FAIR PRICE? (In London)

    2) How do you value a pharmacy? (I have done some reading on internet but not 100% sure about it yet, specially with regards to 100 hour pharmacies)

    3) I have been told by the owner there is already an offer of £450K, and couple of days ago been told again there is another offer for £460K. How do I know either the owner or the agency are telling the truth about the bidding?

    4) Can the accountant change the figures (e.g., Turnover, Expenses etc) in order to make them look better for a potential buyer? (however I have done my calculations for 2016/2017 and they seem to be right)

    5) How long will the process of selling/buying take?

    6) Can I put down less than 20% deposit? (with my property as security), and how much does my property need to have in equity in order to be used as security?


    7) Are there any other sources to obtain finance from for


    1)STOCK (40K)

    and

    2)If the bank values the pharmacy LESS than the asking price?



    8) Is there anything else I need to watch out for?




    I would appreciate your comments and guidance.



    Thanks a lot


    Last edited by peacelover; 19th, November 2017, 08:09 PM.

  • #2
    Look. The GP figures are what the previous owner achieved. What will you achieve? What have you based your calculations on?

    1. Ascertain the validity of items.
    2. Average item value will give you an indication if there are a 7 day Rx's. You will need to adjust for these if GP reverts to 28 day Rx's.
    3. Forget his staff costs. How many do you feel you need. Don't skimp. Take the higher figure (yours vs vendors).
    4. Other running costs? Go with their figures.
    5. Work out how much you need to live? Don't skimp!
    6. Activity fee is a constant.
    7. What purchase profit WILL you achieve?

    6 & 7 will give you your GP. Deduct the costs. Allow £700/£100000/month for a loan. If this isn't crystal clear. PM me.

    Comment


    • peacelover
      peacelover commented
      Editing a comment
      Thanks a lot
      I'll pm you

  • #3
    Don't try to work 100 hours to control costs - how cheap is your health and wellbeing while you are at the beck and call of the local community?
    Also the existing staff will be TUPE to you.
    Most of the time the internet is full of daft opinions and views that you should not take seriously let bother you at all.
    Note : If this posting contains personal views or opinions every endeavour is made to ensure they stay within social media guidelines.
    If you find you have read something that has upset or offended you an anyway please unread it at once.

    Comment


    • peacelover
      peacelover commented
      Editing a comment
      I won't work 100 hours. 50 hours will be covered by locums. as it is now

  • #4
    You need professional advice from an accountant and a solicitor with experience in this area. They can offer far more insight than anyone here.

    Comment


    • #5
      Originally posted by hibernia View Post
      You need professional advice from an accountant and a solicitor with experience in this area. They can offer far more insight than anyone here.
      Really??? My accountant does my tax returns. He does the same for his 100+ contractor clients. He can tell you that his client base has varying GP's, but as to why? Not a chance. He has no idea of the nitty gritty of a Pharmacy contract. That is not his field.
      My solicitor also has 100+ Pharmacy contractor clients. He will read through my lease and particulars of sale. As to valuation? He has no idea. That is not his field.
      My bank will not seek my accountants or solicitors opinion on the merits of my business plans. They will speak to me directly.
      By all means disagree with our advice. We are contractors living the reality. We know our job far better than any accountant or solicitor. Surely?


      Comment


      • #6
        3) I have been told by the owner there is already an offer of £450K, and couple of days ago been told again there is another offer for £460K. How do I know either the owner or the agency are telling the truth about the bidding?

        You don't. Although you know these people so one would hope you can gauge - although maybe closeness could blind you to other factors. You should also know what the non-monetary factors are in negotiation. Perhaps the owner likes you. Perhaps they want to see continuity. Perhaps they have an emotional attachment to it.

        What are the black swans? Such as a GP surgery closes or merges with catastrophic loss of business for either you or another pharmacy. It could be a merger, it could be surgery buyout, it could be partners are the same age and decide to retire at 60 or early. The OTC sales are good. What factors are there for this to decline radically?

        Also on the 100 hour thing. If the landscape changes significantly, would you have the ability and skills to negotiate a new contract down to say something more sustainable like 75-80 hours with the LPC?

        Look up ackerman bargaining. Look up 'labelling' and other techniques in negotiation, not just business school type ones.

        Comment


        • peacelover
          peacelover commented
          Editing a comment
          Yes Owner likes me but obviously he wants the best offer he can get regardless.
          None of the main GP surgeries will close any time soon.
          OTC sales have gone up every year. checked EPOS system.
          Factors for decline mainly due to previous wholesaling and more " specials and special obtain' items.
          NO point in reducing the hours due to the local competition.

      • #7
        Net profit £55k and declining. Am I missing something or doesn't that mean you'd have to work all 100 hours with no holidays just to take home £55k/year? Unless it had huge growth potential or potential to increase margins dramatically you'd be better off locuming, even as an ACT! And that's assuming you didn't have a £30k/year loan repayment commitment!

        Comment


        • peacelover
          peacelover commented
          Editing a comment
          I mentioned £55K excluding main pharmacist. (After deduction of administrative expenses from Gross profit)

      • #8
        Originally posted by Farmer Cyst View Post
        Net profit £55k and declining. Am I missing something or doesn't that mean you'd have to work all 100 hours with no holidays just to take home £55k/year? Unless it had huge growth potential or potential to increase margins dramatically you'd be better off locuming, even as an ACT! And that's assuming you didn't have a £30k/year loan repayment commitment!
        The pharmacist salary is already factored into the expenses, so we don't know how much he gets paid, and the net profit is extra.

        Comment


        • peacelover
          peacelover commented
          Editing a comment
          that's correct

      • #9
        I think you need to carefully consider the figures here. From what you're telling us, the turnover has been decreasing by around 50k per year. More importantly, the net profit has been going down every year as well without fail. What's been happening over the last 5 years to cause this drop? Have you noticed less scripts or less sales?

        Comment


        • peacelover
          peacelover commented
          Editing a comment
          wholesaling stopped in approximately 2014/2015
          OTC sales increased every year. I've checked the EPOS system
          Also checked the FP34s for the last 12 months, in order to calculate the gross profit, and they seem to be right as well. we have lost only few patients.

      • #10
        Originally posted by A Pharmacist View Post
        I think you need to carefully consider the figures here. From what you're telling us, the turnover has been decreasing by around 50k per year. More importantly, the net profit has been going down every year as well without fail. What's been happening over the last 5 years to cause this drop? Have you noticed less scripts or less sales?
        And more work to achieve this?
        Most of the time the internet is full of daft opinions and views that you should not take seriously let bother you at all.
        Note : If this posting contains personal views or opinions every endeavour is made to ensure they stay within social media guidelines.
        If you find you have read something that has upset or offended you an anyway please unread it at once.

        Comment


        • #11
          I would be cautious with this:

          all the udusl KPI's such as turnover, net profit have been consistently dropping. You say you've been in charge for last few years - do you know why? What will you do differently that you are not doing now?

          the other big factor for me is the 2000 items on weekly Rx. Most CCGs are discouraging GPs from issuing weekly Rx and it will only be a matter of time till these will be stopped. Supposing you are still happy to continue to dispense for the patients on 28day Rx you'll be down to less then 3000 items which could quite easily make you unviable especially with a huge cost base of 100 hours and the current funding cuts.Banks normally discount weekly Rx when they value for lending purposes.

          in any case even if the items were stable at £55k net you are at risk if you have a big loan and there are further funding cuts.

          When valuing a pharmacy you should look at its EBITDA which is effectively the profit minus loan interest, depreciation and extraudinary expenses. Your NP figure does not clarify if it's EBITDA or NP (i.e. Has depreciation included). Banks will normally value a 40 hour contract between 5-8 times EBITDA (higher for better quality/secure pharmacies such as Heslth centre)

          gut feeling is your about bout to over pay for a declining business which could lose a further 1500 items if weeklies are stopped. If your looking to borrow more than 60-70% be careful.

          However - bare in mind none of us in this group have seen this shop or worked there. Ultimately if you feel there is potential - make a sensible offer.



          Comment


          • peacelover
            peacelover commented
            Editing a comment
            plz check my answer to previous comments in relation to drop in sales.
            Yes I know the weekly dossetts are a risk and is one of my main concerns. specially with the activity payments: I think the loss will be 1500x125p = £1875/month and £22500/year

        • #12
          You need help in valuing this pharmacy before making a bid and incurring costs. Is lease/rent included in expenses? You cannot buy a pharmacy without the services of a knowledgeable and competent solicitor/accountant and significant associated costs. Don't make an expensive mistake! I know of people that have spent £20-25k before realising it wasn't worth it. Wasted!

          Comment


          • peacelover
            peacelover commented
            Editing a comment
            how can I get it valued? how much is the fee? know any good agents to value? Been told the bank will value it, but ideally I'd like to get it valued before getting to that stage and putting down any deposit. However owner is not very patient and wants to sell it asap (bought other pharmacies and says needs to pay off banks)
            Yes rent and everything else is included in expenses.

        • #13
          Gross profit hovering around an average of 45% looks suspect to me. I thought that 25-30% was more likely. 20 years ago my own business grossed ~25% which was in line with other businesses in the area. More recently I have seen people quoting 30% (although margins are supposed to have dropped).

          Comment


          • peacelover
            peacelover commented
            Editing a comment
            I did ask about it and was told it has to do with the cost of sales.

            Cost of sales:

            2017: £309,499
            2016: £317,749
            2015: £381,483
            2014: £426,785

        • #14
          It has everything to do with the cost of sales, which looks remarkably low to me.

          I suggest you find yourself a good accountant (not necessarily chartered-the certificated accountants csn be much more practically minded) with several years (decades better) experience in the community pharmacy world. They should be better able to advise you.

          Also wrt the goodwill value: 100 hour pharmacies have a much higher t/o threshold before they start to accrue goodwill and others have pointed out that weekly Rx for MDS's are "under review"

          Sorry to be a wet blanket but losing some or all of £450k would be a bit of a naus as well.

          Comment


          • #15
            OK ... here are some thoughts from me ...

            1) Net profit has halfed over the past 3-4 years with no obvious explaination. You were in charge so you can probably get a feel as to what caused this and if it is something that can be reversed.
            2) Don't look extensively at prescription volumes for profit ... the government intention is clear. The remuneration from simply DISPENSING prescriptions does not look sustainable
            3) Look at your repeatable prescriptions - if the patient had to order it from the GP themselves (instead of you ordering it for them on their behalf) then what is the liklihood of them coming to you in the future instead of going elsewhere? There is a push from CCGs for patients themselves to order prescriptions and it appears to be affecting many areas including London. It is likely to spread.
            4) Why is the owner selling it? I can't believe that the owner would get rid of this pharmacy that they believe will be profitable in the long run; especially if they have plans to expand (as you mentioned here)
            5) Look at the potential for additional revenue streams - service driven contracts, potential for local authority and/or CCG serrvices, PGDs and other private services etc. Do these have the ability to offset the losses that you are likely to experience from lower dispensing £ yields in the future? You have been there for a while and therefore know the place better than anyone.
            6) How are you going to man the 100 hour pharmacy without killing yourself or astranging yourself from your family?

            Also, with the government intention of closing pharmacies ... I am not sure if (from what you have said) that this is something that adds up in my mind and it is something that the owner should really be either paying you to get rid of or at least for a lower asking price. It is certainly not something that I would put my own property up against as a guarentee. But having said that I am only going with what you have mentioned here and may have missed out on something.

            Comment


            • peacelover
              peacelover commented
              Editing a comment
              thanks for your views.

              1) I think the main reasons for drop in turnover is: stopping wholesaling in 2014/2015 as well as not claiming out of pocket expenses on prescriptions which was being done to a large extent until local CCG stopped it. However the otc sales has been going up every year, but by looking at the figures I guess not been enough to compensate for wholesaling and out of pocket expenses profits.
              2 and 3) I agree. As we have auto-repeat in this pharmacy whereby we calculate in advance when the Rx will be due and request on behalf of patient (with their consent obviously). I have heard recently (Oct/2017) some CCGs for Northwest London have stopped pharmacies requesting prescriptions. So definitely this is worrying if the the Rx requests are stopped as it will definitely affect sustainability.
              4) Again I agree. His reasons are reducing his commitments and spending more time with family. But as you said I think the drop in turnover, cuts, as well as profitibaility in the long run are the main reasons.
              5) Yes agree
              6) I have managed the place for the last 5 years. I do 5 days during the week Mon-Fri. Work on my own from morning till 12 pm (can manage it as it's not busy till noon time), then have 2 staff at different times (with approximately 2 hours overlap between them) from 12pm till late night.
              Regular Locums cover evenings (from 6/7pm till late night) and Sat and Sun ( with different rates. Some as low as £16/hour). Workload is not much. Small Pharmacy, easily manageable. Honestly doesn't feel like it is killing me.

              My main concerns are:

              1) change of MDS weekly Rxs (RA/RD batches) to 28 days Rxs: as it will mean 1500 items x 1.25 (assumed activity payment per item) = £1875 approximately per month or £22500 per year
              2) local CCG stopping prescription requests from pharmacies. Affecting continuity and sustainability
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