Broker: Corporate sell-offs an opportunity for independents

Business property brokerage Christie & Co recently published its Business Outlook report for 2023, in which it states that despite the many challenges facing the sector, the market for pharmacy transactions is as brisk as it’s ever been. Arthur Walsh speaks to the company’s head of pharmacy, Tony Evans, to dig into the headline findings

P3pharmacy: The Business Outlook report strikes a few notes of caution, such as the impact of rising interest rates and ongoing recruitment challenges. How do you see the year unfolding?

Tony Evans: All those points played out in 2022 in some form across the pharmacy sector, as well as the other sectors we work with. On top of locum rates reaching an all-time high, there have been recruitment challenges for pharmacy as many pharmacists are wooed into GP and primary care network roles. That continues to have an effect on the labour supply market for pharmacists and pharmacy technicians, although some feel it may be starting to subside. This is set to play out across 2023 as well, but I think operators are learning how to contend with it more.

On the bank side, yes they are more cautious because of the rise in interest rates and the cost of borrowing, as well as the increasing costs of running a business. That means they are more discerning with the opportunities that come across their desks – but we’re still seeing some really strong lends already this year, which shows the support is very much there.

Also, the impairment in pharmacy has been far less than we’ve seen with other sectors we deal with. So yes, there are notes of caution, but there are still opportunities out there and banks willing to fund pharmacy acquisitions.

P3: Last year saw a 0.7 per cent increase in pharmacy transaction activity. Have you calculated an estimate for 2023?

TE: It’s difficult to predict at this stage, but I will say that we’ve come back from the Christmas break into what seems to be a very busy market on both fronts – people looking to acquire but also people looking to sell units, whether they’re an existing multiple operator or an independent deciding 2023 is the year they’re looking to exit the sector. It bodes for a busy year – certainly a busy half year.

P3: There seems to be a changing pattern of ownership as the big multiples sell off branches that are then snapped up by independent multiples and single-branch independents. Would that be your view?

TE: If you look at the marketplace and the cost pressures we’ve talked about, they’re not unique to one type of operator. Any operator – whether they’re corporate, large multiples, small independent multiples, regional multiples or independent operators – might look to divest units that are marginal to their existing operations.

Where corporate units do come to market, there are independent contractors who are looking to acquire, and there’s still that appetite from first time buyers. Year-on-year, around 80 per cent of total registrations are from first time buyers; last year, that didn’t necessarily translate into sales – only 23 per cent were to first time buyers. A lot of that is down to certainty.

If somebody’s looking to sell, they want to make sure the sale does go through. With an existing operator who’s probably got existing relationships with banks and a track record and who understands the market, there’s seen to be more security in those purchases than with first time buyers. 

P3: Looking at the pharmacies in your portfolio that are up for sale, what proportion are branches of the big multiples?

TE: At the moment, the majority are independents, but we’ve been acting for some of the corporates over the last year and it’s reasonable to expect those disposals will continue.

We see large corporates trying to tidy up their estate in terms of marginal or non-performing units and putting them on the market. The good thing is that we see a ready home for most of those units; activity has been brisk as independents and first-time buyers size up those opportunities.

P3: And the fact that a pharmacy might have been seen as low-performing within a chain isn’t daunting to an independent buyer?

TE: No – I think there’s a real opportunity there. As you get larger in terms of the group you operate, trying to work away from a ‘one size fits all’ approach is very difficult. It can be harder for corporates to react and adapt and engage on a local level, whereas an independent owner-operator can do that.

It takes investment to turn around one of these pharmacies, and that comes on top of those recruitment challenges. Nonetheless, an owner-operator can still steady that pharmacy’s position and offer a more consistent service to their patients.

P3: The report says buyers are being more “defensive” in their strategy and more “selective” in what they purchase. Could you elaborate on that?

TE: We’ve seen this with some of those corporate disposals in circumstances where an independent tries to acquire the unit to protect their existing business, but also prevent further independent competition coming to the area; those defensive purchases are playing out across the market.

Where we talk about people being more selective, that’s down to the higher volumes in the market, with corporate divestments and independents looking to retire. That inevitably creates more volume, which means that although the demand is still there, you’ve got more to choose from and can be more discerning about what you go for.

P3: Where is demand for pharmacies strongest?

TE: We’ve had good activity across all country regions, with Scotland showing healthy demand. In England, the North West has always been a strong area, as has the South East, but we’ve seen lots of activity across the East and West Midlands, with some very significant deals done already this year, including a group in Spalding.

P3: What are your tips for prospective first-time buyers?

TE: They’ve got to do their homework. Things like understanding the change of ownership process and what’s going to be asked of them by PCSE and NHS England in terms of fitness to practice requirements, getting their referees on board and having all the information to hand. Also, making sure they complete those applications accurately because that can delay things significantly.

Then it’s starting to interact with other business intermediaries like solicitors and accountants and getting their support lined up in readiness for a potential purchase so when they do see something they can react quite quickly. An accountant will help them create the business plans a bank will need to see before they lend. And understanding how it works from a legal point of view, such as the vagaries of share sales and asset sales.

They should also get advice around the leasehold ownership structure so they’re well informed at the time they’re looking at a business; if they’ve done that, they’re in a much better position to acquire.

The other thing I would say is that it’s important to register with all agents and get a feel of what’s happening in the market – we’re not the only agents out there. If you give an agent feedback on why you’re not interested in a particular opportunity, that helps them understand what you’re looking for.

Crucially, first-time buyers need to understand their funding capabilities and how that will play in terms of the offers they make. Talk to brokers – our Christie Finance division supports both secured lending and unsecured lending – and look at the market to understand what funding is going to cost and what they need to do to secure that funding. Ticking these things off means buyers don’t start on the back foot, which makes things much smoother as they progress with their purchase. 

P3: And what about someone looking to sell?

TE: Again, it’s making sure you’ve got all the information available on your business that’s going to help someone consider a purchase of that business; things like making sure the accounts are as up to date as they can be, and providing probably the last three years’ accounts. If it’s a leasehold premises, provide a copy of the lease and make sure any outstanding issues with the lease are resolved.

Also provide information on the trading of the business, such as NHSBSA statements and an overview of local prescribing habits, what the competition is and a breakdown of care home and MDS activity – anything that points to the value of the business and how you’ve operated it.

P3: To what extent does the pharmacy transaction market depend on PSNC being able to secure a better deal?

TE: The five-year deal was acceptable to contractors in a low inflationary economy and last year was anything but that. Because of that, something does need to change and there have been various factors working against pharmacy from that point of view – but the appetite is still there as people still see pharmacy as a long-term business.

We are positive about 2023: there is both demand and ready supply. So, as long as we can get those two to meet, I think we’ll have a very good year.