Deciding when to sell a pharmacy is one of the biggest decisions an owner will make in their career, therefore they will want the market conditions to be the best possible, with premium prices being paid and an abundance of buyers ready and willing.
Before the banking collapse in 2008, pharmacies were selling at record prices in Scotland as supply on the market was scarce. During the recession, the market did cool off with prices lowering to more affordable levels, but again it was very difficult to buy with few people willing to sell during the downturn. In recent years, we have seen prices increase year-on-year as demand continues to grow combined with a lack of willing sellers. Also, the availability of funding from the majority of the high street banks is helping drive more demand into the market - it's clear that money is seen as cheap just now.
Demand is strong
When new pharmacy is placed onto the market, we often hear many buyers ask “why is it so pricey?” However, a pharmacy will often sell well over the asking price as there are many buyers that keep missing out on previous opportunities. As a result, they often push the boat out on the next opportunity, and that is helping prices increase year-on-year. Christie & Co sales evidence shows prices paid for pharmacies in Scotland increased by 13.5% in 2014 and 10.5% in 2015. Also, in 2015, on average, Christie & Co witnessed an average of 8 offers per pharmacy sold, and analysis of sales prices achieved shows that on average buyers paid 111% of the initial asking prices quoted.
Who is buying?
A lot of sellers hold the misconception that the corporate operators are still buying up a lot of pharmacies, but this has not been the case for quite some time now. More so in Scotland, the bulk of the people buying recently are a mix of local group operators, independents and first time buyers alike. Around three quarters of buyers are first time buyers and this can be attributed to locum pharmacists and pharmacy managers looking towards ownership as a way to providing more certainty as their remuneration comes under increasing pressure.
The majority of banks appear only too willing to lend to the pharmacy sector and we continue to see competitive terms being offered to woo operators away from existing lenders or to attract new business. Most banks will assess cases on an individual basis and continue to have regard for loan-to-value and interest cover. Where this is supported by appropriate advice from professional valuers they continue to lend.
Professional valuers normally assess a pharmacy using the pricing parameters below:
Current Pricing Parameters
Community Pharmacy 7.5 to 8.5x EBITDA*
Rural Pharmacy 6.5 to 7.5 x EBITDA*
Integrated Pharmacy 8 to 9 x EBITDA*
*Earnings before Interest, Taxation, Depreciation and Amortisation
Demand across the central belt of Scotland is obviously the strongest, in particular the west of Scotland around Glasgow we see higher prices being paid than the national average. In the west, we can often see prices paid exceeding 10x EBITDA*. Using the old pence in the pound of turnover approach, this can well exceed £1.50 in pound of turnover. This is driven by the higher demand for pharmacies in the Glasgow area than other parts of Scotland, with a large of amount of first time buyers keen to acquire in this area as well as the experienced pharmacy owners who are looking to buy. However, demand across the rest of the central belt is still strong with most pharmacies attracting several offers at closing dates.
Recently, we have witnessed a growing demand for pharmacies further north and in the borders. Over the last year, we have seen pharmacies being sold in Dundee, Aberdeenshire, the Highlands, the Scottish Borders and Argyll & Bute. The people buying outside central Scotland have included both Scottish-based group operators and first time buyers from England.
You may be aware that in England, the Department of Health announced a reduction in 2016/17 Funding by £170 million for pharmacies in England only. The uncertainty this has created has been well documented in both trade and national media. You could argue this helps make the Scottish pharmacy market appear more attractive for willing investors. Only time will tell. However, despite this announcement, Christie & Co have seen little impact on market appetite and pricing in England.