Independents looking to buy a branch need to consider some important factors. As Vinku Shah explains, there is an elephant in the room…

Since the last quarter of 2022, the pharmacy trade news has been dominated by the decision of LloydsPharmacy to offload a raft of their ‘bricks and mortar’ pharmacies. We have been inundated with calls for guidance on whether these are worth considering.

Most of the pharmacies we have looked at are being offered at 50p to 70p in the pound of turnover. Some are well worth acquiring, but others may require further due diligence checks since the information being provided is limited.

The multiple has set a two-month timeline for completion once your offer has been accepted. This gives established pharmacy owners an advantage over first time buyers as lenders struggle to provide funding within the tight timescales for the first-time buyers.

A few independent contractors are looking to acquire branches close to theirs to deter potential competition from another independent operator.

For those looking to buy a LloydsPharmacy branch, these are some of the matters to consider:

1. Assessing the risk

With the lack of profitability (gross and net) data available, it would be advisable to obtain an independent valuation from a pharmacy specialist accountant so that you have some idea on the level of offer to submit.

You adviser should be able to forecast expected net profit before debt servicing to give an indication if the business is worth investing in.

2. Turnover

The turnover figures that are initially being provided are for the year ended 31 March 2017 to 31 March 2022, and a rolling 12-month period to 30 September 2022 and for the 6-month period to 30 September 2022.

The turnover in some cases has declined and potential buyers must analyse the components of turnover to gauge whether there is any scope of increasing this. There are opportunities as many of branches do not provide Additional or Enhanced Services which can help push up the profits.

3. Gross profit

There is no information being provided on the gross profit margins. This could be because the branches are supplied by its own wholesale division and therefore benchmark gross profit is hard to assess.

In the current climate, an independent operator should achieve a gross margin of about 32 per cent through a mixture of astute buying practices, streamlining repeat dispensing processes so that cash is not tied up on stock holding, and managing stock effectively (eg, analysing levels of out-of-date stock and implementing processes to mitigate these).

To further push up the gross profit, you will need to train your team to provide additional services. These will automatically increase margins as the provision of services would not have a cost of sale attached to them.

4. Staffing and locum costs

Owner-managed pharmacies tend to have lower staffing costs and do not rely much on locums. Lloyds pharmacies are managed by employed pharmacists or locums and costs are higher compared to industry norm of 10 -12 per cent of turnover.

A new owner can reduce the reliance on locums to add to the profitability but should pay careful attention to the permanent staff costs and whether there is any scope to bring these down to an acceptable level without having to incur additional costs of redundancy, etc.

5. Leases

This seems to be the elephant in the room with the LloydsPharmacy branches. There are two issues to address: one is rent paid, and the other is the remaining term of the lease.

With rentals, one should look at the current market rent in the area rather than the current rent paid as often it is higher. The next rent review date is also important, and you may need to incorporate an estimated rent increment in any projections prepared for you, whether for your investment decision or to provide for the lenders’ requirements.

We have seen that many leases are short. However, lenders require the unexpired term to be at least equivalent to the term of the loan, which tends to be 10 to 15 years.

You will need to confirm if the lease is protected under the Landlord and Tenant Act 1954 otherwise you could find yourself with no commercial premises should the lease lapse, as the landlord can refuse to renew the lease.

Another option that may be worth considering is if the business can be relocated to a more affordable premises. This is a critical area and proper advice should be sought.

Also note that the rates are expected to increase from April 2023, and these will also need to be factored into your projections.

With the pricing of the Lloyds branches, it may be tempting to offer the asking price, but without careful consideration of the various factors, you may be overpaying.

It is still possible to re-negotiate the price if the deposit has not been paid but your offer has been accepted. We strongly recommend that you appoint a specialist accountant to guide you in the right direction.

Vinku Shah is a partner at Silver Levene LLP. Silver Levene offers a fixed price package service for valuation, cashflow and profit forecast, raising loan finance, due diligence, accountancy and tax services to community pharmacy businesses.