Tips for Buying a Community Pharmacy
By Charlie Le Bon |
When you own your own business, you own your future and control your dreams. For someone with an entrepreneurial spirit, there is tremendous appeal and satisfaction to being a pharmacy owner. You have the privilege of helping people live healthier lives while growing your own business.
While being a small-business owner may be empowering and rewarding, it also comes with a heavy dose of responsibility. Some prefer to focus on the clinical side of the business without worrying about back-office operations, managerial issues or profit-and-loss statements. Yet, if you possess the drive and are able to put in the hours, owning a community pharmacy is easily within your grasp. The first steps are to find the right purchase opportunity and to figure out how to value and structure the deal.
Keys to the right deal – location, volume and due diligence
Once a pharmacist decides to buy a community pharmacy, the first step is picking a location. Because owning and operating a community pharmacy is typically a long-term proposition, pharmacists need to ask themselves: “Where do I want to be for the next 10 or 20 years of my life? Where do I want to raise a family? What type of community do I want to dedicate myself to?”
After defining the geographical search parameters, the next step is to determine what you can afford. Pharmacists can use a store’s volume for flexibility in affordability, as a store’s volume directly correlates with its price. For example, a potential buyer looking for a low entry price can purchase a lower volume store with break-even profitability and then make their own improvements to increase patient volume and the pharmacy’s bottom line. Other pharmacists willing to pay more up front can look for a higher volume store that is already filling 300 to 400 scripts per day and generating healthy cash flow.
To some extent, determining whether to buy a high-volume or low-volume store may depend on the buyer’s financial resources and/or ability to gain financing. Pharmacists planning to buy their own community pharmacy need to plan ahead when structuring a deal. It’s a good idea for buyers to go through a pre-approval process with their lender so they know how much of a loan they can obtain. Doing this legwork up front will enable the buyer to focus the search on pharmacies he or she can afford. This early due diligence work of working with a lender shows a seller you are a serious and motivated buyer. Sellers want to work with a buyer that can execute a transaction.
While a high-volume pharmacy might be on the market for a cost that’s out of your price range, there are plenty of lower-volume pharmacies with significantly lower entry costs. According to the 2016 NCPA digest, almost half of community pharmacies have less than $2.4 million in gross annual sales,1 which often means they are at the break-even point in terms of generating profit. Such a low-volume pharmacy might sell at a fraction of what a high-volume store would garner, so there are certainly opportunities for buyers who do not have the credit or collateral necessary to secure a large loan.
It’s also important to remember that a higher volume store also requires the owner to spend far more money on overhead, including staff, inventory and operations.
At this point, hopefully the pharmacist has identified a pharmacy that checks all the right boxes (right location, ideal volume and affordable), but before any finalizing any deals, it’s essential for the buyer to perform thorough due diligence.
Just as a smart home buyer would hire a professional inspector to evaluate a home, a prudent pharmacy buyer should have a certified public accountant (CPA) review a pharmacy’s records before making a purchase decision. The CPA can scrutinize tax returns, assess profit margins, analyze the seller’s discretionary expenses and check the profit-and-loss logs from sales. While any good CPA should be able to perform an adequate assessment, the buyer may wish to seek the opinions of a CPA from a firm that specializes in pharmacy accounting.
Closing the deal
Buying a pharmacy is a complex process. Pharmacists may have deep clinical expertise, but they usually are not experts in accounting, law, or mergers and acquisitions. That’s why it’s critical for pharmacists buying their own pharmacy to surround themselves with a competent, trusted team of experts and advisors. This team could include an accountant and an attorney, as well as a pharmacy ownership advisor.
Keep in mind that the majority of independent pharmacy owners are over the age of 50,2 and a significant percentage of these owners will likely retire and sell their pharmacies in the next five to 10 years. So, there will be plenty of opportunities for pharmacists looking for community pharmacies to buy.
That said, at the moment, buyers far outnumber sellers by a 2-to-1 ratio. This high demand means that buyers should expect to have competition for desirable pharmacies as soon as they hit the market.
While strong demand may lead to quick sales, it is not necessarily driving up prices in the community pharmacy market. Most buyers depend on bank loans to close the deal, and lenders make their decisions on how much credit to extend based on mathematical calculations involving sales volume, revenue and profits. Accordingly, even a reckless buyer would presumably not be able to offer $1 million for a low-volume pharmacy with negligible profits because the bank would refuse to authorize a loan that was not justified by the pharmacy’s financial performance.
With patience and persistence, determined pharmacists can eventually succeed in negotiating and finalizing a deal that makes sense for them — the right pharmacy in the right location at the right price. Once the deal is done, it’s time to take a deep breath and spend 60 to 90 days analyzing operations before making any major decisions.
This is the time for new owners to observe the pharmacy’s operations on a day-to-day basis to see what works well and where there may be room for improvement. This review period also gives new pharmacy owners an opportunity to evaluate key employees to determine which ones will be a good fit for the new owner’s personality and strategic goals.
Ultimately, owners of community pharmacies can chart their own course, differentiating themselves through superior customer service or by focusing on niche markets like compounding, home medical equipment or medication therapy management (MTM).
Of course, one of the biggest benefits for independent pharmacy owners is long-term investment as the value of the business appreciates. But, venturing down the path of ownership has rewards that are beyond quantitative: being your own boss or having something to pass down through generations.
Thinking about buying a pharmacy? Let us help you put your best business foot forward with expert guidance through our Pharmacy Ownership Services.
1. NCPA 2016 Digest: Opportunities for Community Pharmacy in a Changing Market. Recovered 2018, Feb. 22 from http://www.ncpa.co/pdf/digest/2016/2016-ncpa-digest-spon-cardinal.pdf
2. Ulkens, C. (2003, Nov. 17). NCPA seeks new independent pharmacy owners. Recovered 2018, Feb. 13 from http://drugtopics.modernmedicine.com/drug-topics/content/ncpa-seeks-new-independent-pharmacy-owners?trendmd-shared=0