Are you thinking of buying a pharmacy? If YES, what are the things to look out for and the steps involved? Here is everything you need to know. Owning a pharmacy is not like owning or running just any business, especially since there are many factors to consider that make owning a pharmacy business a unique and challenging experience.
When looking to venture into the pharmaceutical industry, buying an existing pharmacy that already has cash flow is the best way to proceed. When you buy an existing pharmacy, from 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 that average start-up doesn’t even hit the break-even point until 18 to 24 months from the date of opening, you need to have enough cash at hand to keep running for at least that long if not longer.
Also, buying a pharmacy requires financial planning and business evaluation. Most of this planning includes determining the type of pharmacy you wish to purchase. Options include buying an independent pharmacy, going into partnership with an established business, or buying into a pharmacy chain.
Business owners tend to go for the option that best suits the desired pharmacy location and their level of industry experience. For instance, a small, independent pharmacy may be the best option in a small market, but a chain might be more financially viable in an urban area. Since buying a pharmacy is a complex transaction, many owners hire a professional to guide them through the process.
Have it in mind that buying a pharmacy can be a large investment. While most banks see a pharmacy as a strong business proposition, you will most likely need around 20 to 40 percent of your own money to put down on the purchase. Before applying for an SBA loan or commercial loan, assess your finances and know where you stand.
If the bank will not fund the entire buying price, then you have to know how and if you can make up the difference. There is also the option to pursue seller financing opportunities. While most pharmacy sales are all cash, some sellers will finance typically for a term of 3 to 7 years with interest at prime +/- 1 or 2 percent.
Things to Look Out For When Buying a Pharmacy
According to Statista, the industry generates almost $1 trillion USD in revenue on a global scale. Successfully getting your foot in the door of the pharmacy industry can seem overwhelming, but it is certainly possible. If you are interested in buying a pharmacy and joining this massive industry, here are things to look out for;
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Have it in mind that sales and profit growth are a primary factor to look for when buying a pharmacy. Historical trends can give you insights for growth but it is imperative you forecast what growth you believe you can achieve post purchase.
For instance, is the pharmacy presently completing professional services, or would that be an area of growth for you moving forward? Sometimes, businesses that are currently underperforming will have the best opportunities for upside. And don’t forget that the growth you can achieve will determine your overall return of investment in the business.
Franchise or Independently Owned
Though finding franchise opportunities for pharmacies may be harder than looking within other fields, there are some smaller franchise options. Investing in a franchised business will help take some of the decision-making off of your shoulders. One of the best advantages of joining a franchised pharmacy is that you will always have a reliable source to turn to with your questions or concerns.
But starting a pharmacy business from scratch offers its own unique benefits. As an independent pharmacy owner, you will have complete freedom with everything regarding your business. You can use this opportunity to examine your competitors and develop your own niche. It’s necessary to note that you may initially spend more money as an independent owner, but budgeting and financing effectively can keep the spending at bay.
Gross profit margin is another important factor that is critical to consider when analyzing a business’s performance. The gross profit margin puts together a number of factors about the pharmacy including the buying power, competition, product and sales mix, discounting, and branding.
For a pharmacy purchase, it is necessary to consider whether you can maintain the current gross margin of the business or perhaps improve it. Any changes made to gross profit can have a significant impact on the overall profitability of the business and therefore are critical to the viability of the pharmacy.
Team & Wages
Note that wage expense for a pharmacy is the second highest expense after Cost of Goods Sold. Therefore, it is imperative to review the wages and understand the sustainability of the wages expense. It is also very important to look at the pharmacy team as an investment rather than a cost.
In the case of a business sale, the team are also your biggest asset to ensuring continuity of trade during the sale process. Howbeit, a buyer should consider the team that is presently in place at the pharmacy and understand their strengths, weaknesses, any changes that could be made to improve performance as well as how the new owner will fit into the operations. Also, consider how your proposed business strategy will impact on wages.
Lease Terms and Rent
Lease terms are a necessary part of your occupancy costs and should be analyzed in conjunction with the rent. Key factors to consider include the rent review methods (i.e. how the rent is increased each year), any market reviews applicable, length of the lease term, any option periods, marketing costs payable to the landlord, and any other terms and conditions.
Rent is determined by the lease and cannot be altered, unless you get a rent reduction (which does not happen very often) or you move sites (which can be costly). When reviewing the rent, it is important to look at the current rent level and also the lease terms.
Nearby competition is crucial to review when buying a pharmacy. A buyer should analyze the current competition in the local area as well as any potential changes to the competition. It is also imperative to consider competition from non-local competitors such as online etc.
Local Area Development
Have it in mind that growth opportunities for the pharmacy is a key factor to consider. Local area developments can have a massive impact on the future growth potential of a pharmacy; therefore these factors should be considered and factored into your decision (whether positive or negative). The population and local area demographic (as well as any changes in these) should also be considered.
Reason for Sale
Note that the answer to this question can sometimes be difficult to obtain however it will give you a good understanding and insight into the business trajectory. A good number of pharmacy businesses in the United States are currently dealing with retirements of the vendor, however, any insight you can get in relation to the sale will certainly assist with your understanding of the business.
Profit is, without doubt, the most critical factor to look for when analyzing a business Profit & Loss. The bank loan will be paid back by the profit and it is also where the owner gets his/her return. Profit is also the foundation of how the pharmacy price will be determined and how bank valuations are calculated. Ultimately, when buying a business, you want to ensure you can continue to earn good levels of profit and also grow this if possible.
Sales & Profit Variation
When buying a business, you will do good to analyze the historical performance of the business so that you can best forecast what you believe may happen in the future. Review at least 3 years of historical statements to known if there have been any variations in results over the last few years and if so, determine what the reasons may have been for any variations. That will then allow you to have some level of confidence about the future performance.
7 Steps Involved in Buying a Pharmacy
There are many steps involved in the process of buying a pharmacy that can be both time consuming and complex, but at the end of the day, your pharmacy purchase will hopefully bring you great success. Nonetheless, here are the necessary steps to take;
- Start with evaluating your financial situation to determine if you can afford to buy a pharmacy. Take your time to gather all the financial documents necessary, including bank statements and tax returns. Look at your loan opportunities and meet with lenders to determine if you can carry a long-term loan.
- Determine the location of the pharmacy, review market research reports and population demographics to understand the overall size of the pharmacy market, competitors, property selling prices, and demand. For instance, when evaluating urban versus rural areas, note that pharmacies in rural areas will sell for a lower price and offer the advantage of fewer competitors.
- At this point, find a pharmacy for sale. Carefully review listings in classified advertising, either in local newspapers or in local or state pharmacy journals. Visit the National Community Pharmacists Association website for a listing of available properties and contact information.
- You should also consider hiring a pharmacy broker to assist in finding pharmacies for sale. Brokers participate in the buying process by working with the buyer and seller to assess, negotiate and complete the transaction. Meet with the broker and outline the type of pharmacy you want to purchase. Review the broker’s listings and select some properties.
- Visit and analyze all potential pharmacy sites with the broker. Consider the business size and local competitors. Also, compare the asking price to the market price. Conduct an in-depth interview with the current owner. Evaluate the ease of access to the pharmacy, both by car and on foot.
- Then hire an assessor to evaluate the condition and value of the business and building, if buying the real property. Ask for a complete financial analysis, including a review of financial reports for the previous 10 years and relevant tax filings.
- Carefully review the assessor’s report. Discuss with the broker, if necessary, and buy the pharmacy. You can negotiate with the seller or request the broker provide the service.
Owning a pharmacy is a great platform for you to give back to your community, but in order to do this, it is necessary that you get the financial side right too. The financial aspects of entering the pharmacy business involves a bit more planning than others. To help your sale go smoothly and ensure you are making a wise investment, work with a trusted advisor to analyze the pharmacy’s financial statements and cash flow, as well as the average monthly expenses.