Buying your first pharmacy: what a lender actually wants to see

Q: What does a lender read in the business plan?

Three things, closely. The rest is skimmed. Maintainable profit, after paying a pharmacist properly. A profit that exists only because the owner worked six days a week for nothing will be stripped out - build the plan with a real salary for whoever stands in the dispensary. The item trend, and the reason for it. Not this year's number - the direction over three years, explained. A surgery that closed, a nursing home won, a pharmacy that opened two doors down. Unexplained decline reads far worse than explained. What is left after the loan. Repayments, your drawings, corporation tax, and a margin for the month that goes wrong. The arithmetic behind how a pharmacy valuation is built is what a credit team does from the other side of the table.

rajkamalbhatti

Sep 25

6 min read

Updated: Oct 1

A lender lends against the cash the pharmacy generates - most of it NHS money, paid monthly and in arrears - and against you: your pharmacy experience, the deposit you put in, and the guarantee you sign. What you are buying is mostly goodwill, which cannot be repossessed, so the decision rests on whether the NHS income is durable and whether you can be relied on to run it. A credit decision agreed in principle before you offer keeps the funding, the lease and the NHS change of ownership application on one timetable, because all three run in the same few weeks.

Does the lease affect how much I can borrow?

Yes, if the loan term is capped at the unexpired term of the lease - ask early whether it will be. A short lease then raises the monthly repayment and cuts what you can borrow against the same profit. A freehold moves the other way: there is then an asset to value and charge.

How much deposit do I need, and where does it come from?

It has to be demonstrably yours, and it will not be a token. What you contribute moves with the quality of the business, the strength of the borrower and the conditions of the day - so anyone quoting a fixed figure before seeing the accounts is guessing.

It comes from savings, a family gift, a deferred element the seller leaves in, or equity released against your home - which puts the house in the deal whatever the company structure says. Every pound has to survive anti-money-laundering checks: a deposit appearing three weeks before completion with no history behind it will stop the transaction dead.

Does it count against me that I have never owned a pharmacy?

No, provided you have run one. What is assessed is operating experience rather than ownership history.

What is looked for is specific: that you have acted as responsible pharmacist, managed a branch and its people, and carried a budget. If you buy through a limited company, that company must have a superintendent pharmacist who is also a senior manager of the business, under section 71 of the Medicines Act 1968. The superintendent and the responsible pharmacist are different statutory roles, easily confused. If you are going to be both, say so - and answer the question nobody pre-empts: who covers the pharmacy when you are not in it?

What does a lender read in the business plan?

Three things, closely. The rest is skimmed.

Maintainable profit, after paying a pharmacist properly. A profit that exists only because the owner worked six days a week for nothing will be stripped out - build the plan with a real salary for whoever stands in the dispensary.
The item trend, and the reason for it. Not this year's number - the direction over three years, explained. A surgery that closed, a nursing home won, a pharmacy that opened two doors down. Unexplained decline reads far worse than explained.
What is left after the loan. Repayments, your drawings, corporation tax, and a margin for the month that goes wrong.

The arithmetic behind how a pharmacy valuation is built is what a credit team does from the other side of the table.

What will I be asked to sign, and what does a personal guarantee mean?

Expect a facility letter with conditions attached, security over the business, and a personal guarantee. A personal guarantee means that if the company cannot repay, you can be pursued for the money personally.

The security is a debenture over the company's assets and a legal charge over any property, and the money is not released until the conditions are met: the change of ownership grant, the landlord's consent, insurance, sometimes a valuation. Take independent legal advice before signing, and insist on it where a home or a spouse is caught.

What does a lender's own valuation change?

It resets the size of the loan. A lender may commission its own valuation once a price is agreed, and if it comes in below your offer, the lending is sized on that figure.

The gap lands on you: a larger contribution, a renegotiated price, or a deferred payment the seller has to accept. That conversation is easier at heads of terms than three weeks before completion, which is why the eight steps of a purchase put funding early.

Why do the funding and the NHS application have to run in parallel?

Because neither waits for the other and both take weeks. You cannot complete first and sort the NHS contract out afterwards.

The incoming owner applies under regulation 26 of the National Health Service (Pharmaceutical and Local Pharmaceutical Services) Regulations 2013, to NHS England, whose market entry function your Integrated Care Board exercises under delegation, through Primary Care Support England. A change of ownership at the same premises, carrying on the same services without interruption, is not notifiable, so the determination period is 30 days from the date a complete application is received - not from the date you send it - and it is not tested against the pharmaceutical needs assessment, because regulation 26(1) disapplies section 129(2A) of the NHS Act 2006. Take the same business to different premises and regulation 26(2) applies instead: paragraph 18 of Schedule 2 makes that notifiable, and paragraph 27(b)(i) gives it four months rather than 30 days.

After the grant, a notice of commencement naming your completion date has to be given at least 30 days ahead, unless a shorter period is agreed. The landlord's consent to assign has no statutory deadline - section 1 of the Landlord and Tenant Act 1988 requires a response within a reasonable time. If you are incorporating a company to buy through, each new director has to verify their identity with Companies House before they are appointed, and it is an offence to act as a director without having done so, while a new person with significant control gives their personal code when they are first added to the register, or within 14 days of the date on the letter Companies House sends shortly afterwards.

The General Pharmaceutical Council (GPhC) notification runs the other way: where the owner changes, section 74H of the Medicines Act 1968 gives you 28 days beginning with the date of the change, or the entry for the premises in the register ceases to be valid. Buy the shares instead and the registered owner has not changed, so no change of ownership notification arises - though a new superintendent must still be notified. What happens to the NHS contract sets out the sequence.

What do first-time buyers forget to fund?

The money that leaves before the NHS money arrives. The loan covers the price; it may not cover the gap before the first NHS payments reach you.

Working capital. You declare through the Manage Your Service (MYS) portal by the 5th of the month after you dispense, the advance payment follows four working days after that deadline, and the final reconciliation lands roughly two months after the submission. Miss the 5th and the advance moves to on or around the 1st of the month after submission.
Stock at completion. Counted and valued separately on the day and paid for on top of the price.
A new contractor code. Where the business is bought on an asset basis rather than the company being taken over, the NHS Business Services Authority issues a new contractor code, and a bank and correspondence details proforma has to reach its customer payments team.
Professional fees. Your solicitor, your accountant, the lender's costs, the market entry application fee set by the Pharmaceutical Services (Fees for Applications) Directions 2013, and the GPhC notification fee.
VAT. Dispensing on prescription is zero-rated under Group 12 of Schedule 8 to the Value Added Tax Act 1994, so a pharmacy recovers more VAT than it charges. The risk is funding VAT on the purchase itself if the sale does not qualify as a transfer of a going concern - your accountant settles that before exchange.

Why do first purchases fall through?

The cause is usually structural rather than personal. These are the common ones, and the order is not a measured frequency:

The valuation came in under the agreed figure and nobody bridged the gap.
The lease - too short for the loan term, contracted out of the Landlord and Tenant Act 1954 security of tenure provisions without anyone checking, or a landlord who would not consent in time.
Due diligence found the profit was not maintainable: unpaid owner hours, a one-off service income, items drifting down.
The regulation 26 application went in incomplete, so the 30 days never started.

Each is avoided at the beginning rather than the end: most of the work on a first purchase is sequencing.

This is general information about funding a pharmacy purchase in England and not legal, tax or financial advice; your solicitor and accountant confirm the legal and tax points for your own purchase. If you are working towards a first pharmacy and want to know whether the numbers and the timetable hold together, tell us where you are.

Rajkamal Singh Bhatti MPharm is a practising pharmacist (GPhC registration 2230365) and a former Superintendent Pharmacist of a national group of 120 branches, which he took through insolvency and sale. He founded RSB Consulting.