It’s time to grow your pharmacy business
01 Nov 2016
Jason Bradshaw FCA, Director of Corporate Finance with PKF O’Connor, Leddy & Holmes Limited, gives advice on the opportunities for growing pharmacy businesses in Ireland
The Irish Economy continues to show signs of improvement. The European Commission has predicted 4.5% growth in Ireland’s GDP for 2016 and a further increase of 3.5% in 2017. Economic growth that has previously been sustained by exports and Foreign Direct Investment is now spilling into the domestic economy.
Unemployment fell into the single digits during the first quarter of 2015. By December 2015, the rate had reduced to 8.8%. This level of employment has not been witnessed in Ireland since 2008. Consumer spending in predicted to increase by 3.2% in 2016 following on from 3.4% growth in 2015. The economy overall is showing strong and resilient recovery. The time could not be better to follow suit and grow your pharmacy business. You now need to prepare your future business development plan.
Your pharmacy business has survived during the recession. Turnover has declined considerably over the last seven years which was instigated by FEMPI legislation, Generic Substitution & Reference Pricing and the economic recession. There are, however, a number of positives to consider:
- Front-of-Shop (FoS) and Over-the-Counter (OTC) sales are expanding again.
- Gross margin in the retail pharmacy sector has now stabilised.
- Overall we should see Turnover stabilise or begin to grow slightly in 2016.
How healthy is your pharmacy business?
If your company Balance Sheet is healthy, with minimal or no debt and your cash flow situation is positive, then you are in an ideal position to formulate your strategic plan for future growth. Now is the time to put excess cash in the business to good use.
With deposit rates returning less than 1% and interest earned subject to DIRT at 41%, excess cash has no benefit to the business sitting on the Balance Sheet.
Competition in the market is increasing. Growing your market share is imperative. Planning your expansion strategy is critical.
We suggest two expansion strategies that you should be considering for your pharmacy business:
A pharmacy business needs to meet the needs of its community. Customers and their needs are changing all the time. How do you answer the following questions?
- Are there certain products or services that your pharmacy is unable to provide to your customers due to space limitation or antiquated store design?
- Does your pharmacy suffer staffing or dispensing inefficiencies that are hindering the services you provide to your customers?
- Has it been more than seven to 10 years since your pharmacy business underwent a shop refit?
If your answer is ‘yes’ to some or all of these questions it is likely that your pharmacy business would benefit from an expansion or refit. Expanding your retail space by extending the unit, expanding into an adjoining unit or relocating to a more suitable unit in the immediate area may be worth considering. Otherwise, modernising the layout could dramatically increase the appeal and internal visual impact of your business to the customer. Pharmacies that have undergone a substantial refit have realised increases in Turnover of up to 10% or even 15%. A refit or expansion could enable you to:
- Improve the overall retail experience for the customer.
- Improve the working conditions and boost staff morale.
- Take full advantage of the retail opportunity presented by your customers.
- Reduce the time taken to dispense medicines by integrating a modern dispensary design.
- Decrease the number of employees required to staff the business by thoughtfully designing the layout of the interior.
- Re-design and re-allocate retail space based on the Gross Profit contribution of each product.
You could consider financing a refit or expansion of your pharmacy business using company cash reserves. Additionally, it may be beneficial to invest some of the expenditure personally as there may be tax reliefs such as The Employment and Investment Incentive Scheme (EIIS) available to you. Professional Corporate Finance advice will thoroughly appraise how your pharmacy business will benefit from expansion and help you implement your growth plan.
It may be the case that your pharmacy business has a modern fit-out and has little or no room for further expansion. If your business is running at maximum efficiency and profitability, then it could be time to consider expanding externally. Pharmacy business owners have the option to either establish a Greenfield pharmacy or acquire an existing pharmacy business.
Establishing a new Greenfield pharmacy business may be a viable solution in a town, for example, that plans to develop a new primary care centre or a town which is expanding rapidly. A Greenfield pharmacy will be cheaper to set-up given there is no Goodwill to purchase. There are, however, a number of drawbacks to this option:
- Turnover has to be developed from zero, which will impede cash flow.
- The pharmacy has no existing customers.
- There is no historical gauge as to the financial success of the pharmacy business.
- It may take a long time to reach breakeven point.
- Additional promotor’s equity will be required if estimated Turnover levels are not achieved.
Existing pharmacy businesses do come to the market regularly. There are several benefits to buying an existing pharmacy business:
- The previous owners have already established the Goodwill of the business.
- Turnover already exists, so it is not a case of building it from zero.
- The pharmacy has immediate access to customers.
- Synergies can be achieved across several pharmacy businesses, e.g. staff rosters, insurance, supplier discounts, creditors terms etc.
Below is an example of how a pharmacy acquisition could be funded.
Contract price of €1,050,000 (including Net Assets, Professional fees and Stamp Duty)
Bank loan facility repayable over 12 years at c .4.5% (Typical margin 3.5%)
Supplier loan facility repayable over 3 years at c. 6%
Total Acquisition costs
Fortunately, banks are actively lending to the retail pharmacy sector. A bank will, however, de-risk their interest somewhat by capping their lending to circa 50% in the case of a Greenfield or 70% in the case of an acquisition.
In terms of financial planning, the balance of funding should be made up of a combination of promotor’s equity and a small supplier loan. Promotor’s equity may be eligible for EIIS relief if, for instance, it is a Greenfield site or if the pharmacy business has been established for less than seven years.
Planning your expansion strategy
A major investment, such as establishing a Greenfield or acquiring a pharmacy business, requires careful consideration and planning.
It is essential that your strategy follows your business development plan. Partnering with a key employee could be an effective strategy worth considering if you may be unable to effectively manage more than one pharmacy business single-handedly.
With the Irish Economy improving, now is the time to plan for the future of your pharmacy business. Excess cash that is not required in the day-to-day operation of the business should be put to better use.
Standing still while your competitors plan and implement their growth strategies is not enough, you will be left behind. Community pharmacy businesses need to adapt to meet the needs of an ever-changing customer.
Recognising and adapting to cater for the changing landscape is critical. Surviving will no longer suffice; growth and expansion will be the key factors in the success of your pharmacy business into the future.
Consider internal expansion and maximise the internal efficiencies of your business, your employees and your premises. Once this is achieved it may be time to consider expanding externally.
Remember that the growth of your pharmacy business requires a business development plan. You should seek professional advice to maximise realisable value and to structure both your personal and business affairs in the most efficient manner. It is essential for all pharmacy owners to engage the services of a Chartered Accountant who specialises in the retail pharmacy sector. This expertise can provide invaluable advice on the preparation of your business development plan, review the financial performance of your pharmacy and can help you plan for your future growth.
PKF O’Connor, Leddy and Holmes Limited are one of the leading specialists to Independent Pharmacy Owners in Ireland. We are Accountants and Business Advisers to the Healthcare Sector for over 50 years. Contact us today for a free consultation.
Jason Bradshaw is Director of Corporate Finance at PKF O’Connor, Leddy & Holmes Limited. Jason specialises in providing advice on business development plans, valuations, merger/acquisition/retirement planning advice etc. to the retail Pharmacy sector. Contact details: email@example.com / +353 1 496 1444 / www.pkf.ie.