want to own a pharmacy

So you want to own an independent retail pharmacy but you’re not certain where to begin? Owning an independent retail pharmacy is not like owning just any business, there are many factors to weigh and consider that make owning a pharmacy business a unique and challenging experience.

Let’s start by answering a few initial questions:

  1. Is it better to purchase an existing pharmacy, or start one from scratch?

Purchasing an existing pharmacy that already has cash flow is the best way to proceed. The first day you take possession of the store, you have customers, transactions, inventory and employees. You can start making money and improvements on day one. With a start-up pharmacy, you have to hire staff, buy inventory, build or remodel a location and then figure out how to get customers to come into your store.  Considering the average start-up doesn’t even hit the break-even point until 18 to 24 months from the date of opening, you have to have enough cash on hand to keep running for at least that long if not longer.

If you still think starting a pharmacy from scratch is what you want to do, consider hiring an experienced pharmacy consulting firm to complete a feasibility study on your location prior to taking out a loan and potentially making a mistake.  More on feasibility studies in a future blog, but it’s worth the money to have an expert look into things before you decide to open a start-up pharmacy. Our conclusion is that it’s not always a bad idea to open a pharmacy from scratch, but having a customer base and positive cash flow on day one is hard to argue against.

  1. How can I tell if the pharmacy for sale has enough cash flow, or is worth the price being asked?

This is where a pharmacy valuation comes into play. The purpose of a pharmacy valuation is to give a fair market value or purchase price based on the true performance of the pharmacy. A good pharmacy valuation will use several formulas to do this (there is really no single ideal formula) and pharmacy businesses are unique so valuing them is a process unlike any other business. A common method used to calculate the fair market value of a pharmacy is to simply look at the number of scripts or the gross sales the pharmacy has coming in. The gross sales of the pharmacy won’t tell the full story or take into account the most crucial factors, which are profitability and cash flow but it is always where you begin.

You have probably heard the term “GOODWILL”, which is what pharmacy owners typically talk about when pricing their pharmacy to sell. The pharmacy valuation calculates GOODWILL using a much more scientific and in-depth approach. Using a pharmacy consulting firm that specializes in pharmacy valuations and brokerage to represent you is always the best way to make certain you are making the right decisions.

  1. What documents are needed to do a proper pharmacy valuation?

The standard documents required to complete a pharmacy valuation is at least 2 – 3 years of tax returns, profit & loss statements and year-end balance sheets. This will allow the valuator to calculate EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).

This figure is important because it will show the impact of the operating decisions being made without other subjective distractions such as governmental regulations and accounting.

  1. So what’s the most important thing to keep in mind when trying to find the fair market value of an existing pharmacy?

Arguably though, the most important part of this process is for the buyer to make certain the valuator is asking specific questions about the business, helping to gain an understanding of the expenses that are unique to the current owner and therefore will not be assumed by you the buyer/new owner. These expenses can be added onto the pharmacy’s bottom line.  Although on the surface this appears to help the seller (i.e. increasing the value of the store), it also paints an accurate picture as to the actual cash flow of the pharmacy business. Banks will often use these same formulas when doing underwriting for a loan, so a proper pharmacy valuation may increase the value of the pharmacy, thereby driving up the cost for the potential buyer, but it will show how healthy the business truly is and that’s important if you are going to acquire financing and be successful as the new owner.

  1. How should I make an offer to the pharmacy owner?

After you feel comfortable that the valuation has been done properly, it’s time to make an offer.  There’s no real magic here, you just need to propose the price and terms that you feel the seller will want. Keep in mind, the seller may not accept your initial offer and will therefore propose a counter offer, but this is be expected.

You may really want to buy a particular pharmacy BUT remember, only offer a figure you are comfortable with (not outside your budget) that makes sense in terms of cash flow. You need to ensure that if the sale goes through, there is enough margin to pay yourself a salary plus the monthly loan payment.

There are many other factors to weigh when purchasing a pharmacy. What are the current trends of this particular pharmacy and neighborhood/city? What other services do they offer such as immunizations or MTMs? Do they have a large profitable front-end? Are there other services you could offer once you take over the business? Is there room for improvement/expansion? Are they selling popular items like CBD to drive foot traffic? Often times, the previous owners may not be offering services or products that could bring in additional revenue with decent margins because they became complacent.  If you have the knowledge, energy and drive, you can make almost any pharmacy more profitable.

Ready to take that next step?

Consider working with an expert in Pharmacy Brokerage and Valuations like PRS Pharmacy Services.  As the only broker endorsed by NCPA, with more than 38 years helping independent pharmacies, we know how to ensure that the process of buying a pharmacy goes smoothly and with as little stress as possible.  There are many companies claiming to be experts in pharmacy brokerage but our reputation and endorsements can give you the peace of mind you need that a true expert will walk you through the entire process.

We are pharmacist owned and operated so we understand how pharmacies work. We know that there are thousands of independent pharmacies in the world and every single one is unique. Our specialists can help you every step of the way whether you are just starting to plan an acquisition, beginning to look at a location to build a new pharmacy or you already have an existing pharmacy ready to buy.

We are a diverse pharmacy consulting firm with expertise in pharmacy valuations and feasibility studies and specializing in pharmacy brokerage services such as buying, selling, transitions and start-ups. We are an accredited broker and fully licensed.

Contact PRS today if you are thinking about buying, selling or opening a pharmacy. We would love to help you!

Written by Scott Weaver, R.Ph.

Scott is a registered pharmacist and an Accredited Business Intermediary.  His education and decades of experience working in and helping independent pharmacies would be invaluable to any new or existing pharmacy owner and a must have for any non-pharmacist business owner looking to buy a pharmacy.  He is the current VP of Pharmacy at PRS and conducts seminars for numerous trade organizations and groups every year. Scott has successfully assisted hundreds of pharmacy owners over his 30+ years with PRS.