Financing the purchase

Before you explore the finance options available to you in buying a pharmacy business, it’s important that the business you intend to buy suits your requirements from both a professional and financial angle. So the use of an accountant at this juncture is highly recommended. Various companies provide pharmacy valuation services and have a database of pharmacies for sale.

When you have decided which type of business is right for you, it’s time to begin looking at where the money will come from. Take care not to overstretch yourself and to understand the costs involved in buying a pharmacy before you proceed. It’s highly likely you will be expected to contribute a minimum of 20–30 per cent towards the purchase of a pharmacy business although, depending on how interest rates stand, some lenders may consider less.

The most common finance choices available to pharmacists are:

• Start-up loans from banks and other financial institutions;
• Wholesaler loan guarantee schemes.

Start-up loans

A start-up loan from a bank or finance broker requires a lot of research and it’s worth looking around because charges and rates can vary tremendously. Make sure that you insist on being quoted the APR (which reflects the true cost of borrowing after charges and fees etc.). This means you compare apples with apples rather than apples with pears. Also, should things go well for you during the first few years of pharmacy ownership, you may find you can repay the loan early, so it’s important to get the lender’s published terms from the outset. Then if you wish to go down the early settlement route it means you won’t be exposed to any nasty surprises! Unlike the wholesaler loan guarantee schemes (detailed below), once you have secured a loan you will be free to purchase your pharmaceutical stock from your choice of supplier, leaving you free to secure the best prices and improve margins. If a lesser-known organisation is the preferred choice to help finance the purchase, you should make sure it is regulated by the Financial Services Authority.

Wholesaler loan guarantee schemes

Because pharmacy ownership is viewed as a good risk, some of the pharmaceutical wholesalers are able to provide banks with guarantees for their customers. Rather than lending money directly, they facilitate the transaction between the lender and the borrower and by acting as underwriters they can secure competitive interest rates of around 1–1.5 per cent over base rate. However, it’s important to understand their terms, as most wholesalers will ask for about 70 per cent of your pharmaceutical purchases, which obviously restricts you and leaves you unable to shop around for the best deal from alternative suppliers. But because these schemes do offer such good interest rates it’s worth doing the comparison.

It’s important to note that wholesalers have a good understanding and a large amount of experience in the pharmacy market and so can vet applications for appropriateness and provide advice on future plans for business growth, usually at no charge. Both start-up loans and wholesaler loan guarantee schemes have their merits but again, it is strongly advised that an accountant is involved in choosing the right option.

Trading arrangements

It’s important to decide how you want to trade from an early stage. The most likely trading arrangements for a pharmacy business will be sole trader, limited company or partnership. Each option has varying levels of administration and, for the inexperienced trader, professional advice should be sought.

Expanding your business

The growth of your business is extremely important and, as a pharmacy owner, you can no longer rely on dispensing fees alone to fund its growth. Following the introduction of the new contract, you now face many challenges and careful business planning will be critical to your future success. It may be that you want to invest in a pharmacy refit or a delivery van, or with Electronic Prescription Service (EPS) just around the corner it may be time to invest in new IT equipment. Whatever your plans for expansion, it’s likely that you’ll want to source additional finance.

There are various options available but it’s advisable to tread with caution before deciding which route to choose. Once again, conventional loans from banks and wholesaler loan guarantee schemes are possible but it’s also worth considering alternatives such as:

Hire purchase

This method of finance is often ideal for smaller businesses looking to invest in assets for long-term growth. Unlike loans, you do not legally own the asset until the last repayment, which means that for the length of the hire purchase agreement you will be unable to sell the goods without the lender’s permission and you will be liable for any damage caused to the goods. Ordinarily the interest rate is fixed, which allows you to budget with confidence, but – as with loans – be sure to obtain the APR so you know exactly how much you are paying.

Lease rental

Leasing is also a popular option for many businesses as it allows you to pay a fixed amount each month. The total cost of lease rentals can be deducted from taxable income as a trading expense. It can also help to ease cash flow as lump outgoings can be reduced from capital budget. However, after the last repayment, ownership does not pass to you but it is likely that you will have the option to renew the lease or, for a fee, purchase the asset.

Selling your business

It goes without saying that your pharmacy is more likely to sell for the best price if it’s presented well and all the necessary accounts and records are up to date. If there is a shortfall in these areas then it’s well worth getting them back into shape before you put the pharmacy on the market. Even if you don’t want to go to the expense of a refurbishment, then consider a good clean and tidy-up, and organise for your stock to be merchandised. Additionally organise (or ask your accountant to organise) your accounts, VAT returns, PPA statements etc., ready for inspection by potential pharmacy purchasers.

It’s also worth considering the tax implications once you sell the pharmacy to ensure you reduce capital gains/corporation tax and make the most of tax allowances.

When you’re ready to sell it is well worth considering employing an agent to value the business and handle the sale on your behalf (obviously get more than one valuation). There are a number of companies who offer such a service and when deciding whom to use check their commission charge (usually around 2–3 per cent). A charge of an additional 1 per cent could make all the difference on the profit you make, especially if the valuation of the business is high.

Like selling a house, don’t feel tempted to accept the first offer you receive. Decide on the lowest price you will take for the business and let the agent do the work – it’s what you’re paying them for.

Once an offer has been accepted, decide on a date by which you want the sale completed and inform your solicitors. It’s important to keep in close contact with your solicitor during this time in case questions arise and, if they do, make sure they’re dealt with promptly. The last thing you want at this stage is frustrated purchasers pulling out because the necessary paperwork hasn’t been processed.

Following the sale

There are various points for consideration once the sale is complete and again it’s time to have a discussion with your accountant. Money generated from the sale will now be part of your estate, which in turn will be subject to inheritance tax, so forward planning is essential to ensure you have a chance to reap the rewards you deserve following the sale of your business.