Buying a Pharmacy: What Should You Consider?
Buying an independent pharmacy can be an opportunity to become a business owner while taking over an established operation with existing customers, employees, systems, and vendor relationships. Before moving forward, however, prospective owners should carefully evaluate both the business and the responsibilities that come with ownership.
For pharmacists considering pharmacy practice financing, understanding what to evaluate before purchasing a pharmacy can help make the process more organized and informed.
Understand Why the Pharmacy Is Being Sold
One of the first questions a prospective buyer should ask is why the owner is selling.
There may be a straightforward reason, such as retirement, relocation, or a desire to pursue another opportunity. In other cases, the seller may be dealing with operational or financial challenges.
Understanding the reason for the sale can provide useful context when evaluating the opportunity.
Review the Pharmacy’s Financial Performance
A pharmacy’s financial history is one of the most important areas to review before making an offer.
Buyers should examine financial statements and look at trends rather than focusing on a single year.
Important areas to review can include:
- Total revenue
- Gross profit
- Operating expenses
- Owner compensation
- Cash flow
- Accounts receivable
- Inventory
- Existing debt
Historical cash flow is particularly important because it can help a buyer understand whether the business has the financial capacity to support its ongoing operations and potential financing obligations.
Evaluate Prescription Volume
Prescription volume can provide important insight into the activity of an independent pharmacy.
Buyers may want to understand the number of prescriptions being filled, trends in prescription volume, and the types of prescriptions that make up the business.
It can also be useful to understand whether prescription volume has been stable, increasing, or declining.
A declining trend does not automatically mean the pharmacy is a poor investment, but it should prompt additional questions about the reasons behind the change.
Understand the Pharmacy’s Payer Mix
Not all prescription revenue has the same economics.
Buyers should understand the pharmacy’s payer mix and how reimbursement arrangements affect gross margins and cash flow.
The business may have relationships involving commercial insurance, Medicare, Medicaid, cash-paying customers, long-term care, workers’ compensation, or other reimbursement arrangements.
Understanding where the pharmacy’s revenue comes from can help a buyer better evaluate the overall business.
Review Accounts Receivable
Accounts receivable can have a significant effect on a pharmacy’s cash flow.
A buyer should understand how much money is owed to the pharmacy, who owes it, and how quickly those balances are generally collected.
It can also be useful to review the age of outstanding receivables.
Older receivables may require additional attention and should be considered when evaluating the overall financial condition of the business.
Examine Inventory Carefully
Inventory can represent a substantial portion of a pharmacy’s assets.
A buyer should understand the current inventory level and determine whether the inventory is turning over efficiently.
The review may also identify:
- Slow-moving products
- Expired or soon-to-expire inventory
- Specialty medications
- Overstocked products
- Inventory that may have limited resale value
The inventory included in the transaction should be clearly defined as part of the purchase process.
Evaluate the Pharmacy’s Location
Location can be an important factor in an independent pharmacy’s long-term performance.
Buyers should consider the surrounding population, nearby competitors, accessibility, parking, visibility, demographics, and relationships with nearby healthcare providers.
The location should also be considered in connection with the pharmacy’s existing customer base.
A strong existing business may depend heavily on its current location, making the terms of the property lease an important part of the transaction.
Review the Lease or Real Estate
If the pharmacy operates from leased space, the buyer should carefully review the lease.
Important considerations can include:
- Remaining lease term
- Renewal options
- Rent increases
- Assignment provisions
- Maintenance responsibilities
- Landlord requirements
If real estate is being purchased with the pharmacy, the property should be evaluated separately from the operating business.
Understand Employee Responsibilities
Employees are an important part of an independent pharmacy.
A buyer should understand the current staffing structure, employee responsibilities, compensation, benefits, tenure, and any positions that may be difficult to replace.
It is also worth considering how dependent the pharmacy is on the current owner or key employees.
If the seller personally handles many important responsibilities, the transition may require additional planning.
Review Vendor and Supplier Relationships
Pharmacies rely on wholesalers, vendors, technology providers, and other business relationships.
Before purchasing a pharmacy, buyers should understand which agreements will continue after the transaction and whether any contracts require approval when ownership changes.
Supplier terms can also have an impact on inventory management and cash flow.
Understand Specialty Services
Some pharmacies offer services beyond traditional prescription dispensing.
These may include:
- Compounding
- Specialty medications
- Long-term care services
- Medication synchronization
- Delivery
- Immunizations
- Durable medical equipment
Buyers should understand how much revenue and profit these services contribute and whether they require specialized employees, equipment, contracts, or regulatory considerations.
Consider the Pharmacy’s Competitive Position
A pharmacy should be evaluated within its local market.
Consider the number of competing pharmacies nearby, the presence of national chains, independent competitors, specialty pharmacies, mail-order options, and other alternatives available to patients.
The pharmacy’s reputation and relationships within the local community can also be important considerations.
Look at the Customer Base
An established customer base can be one of the major advantages of purchasing an existing pharmacy.
Buyers should understand who the customers are and how dependent the pharmacy is on a relatively small number of customers, facilities, providers, or contracts.
Customer concentration can create additional risk if a significant portion of revenue depends on one relationship.
Evaluate the Asking Price
The purchase price should be evaluated in relation to the pharmacy’s financial performance, assets, customer base, prescription volume, growth opportunities, and overall risk.
A buyer should avoid assuming that a pharmacy is a good investment simply because the asking price appears reasonable.
The price needs to make sense relative to the cash flow the business can reasonably generate.
An independent pharmacy’s value can involve both tangible and intangible elements, which is one reason a detailed financial review is important before purchasing.
Consider Your Role as the Owner
Buying a pharmacy also means taking responsibility for running a business.
Prospective owners should consider whether they are prepared to manage:
- Employees
- Vendor relationships
- Financial performance
- Regulatory requirements
- Customer relationships
- Inventory
- Business development
Being an excellent pharmacist and being an effective business owner require overlapping but different skill sets.
Plan for the Transition
A smooth transition can be important when purchasing an established pharmacy.
The buyer may need to coordinate with the seller, employees, vendors, customers, professional advisors, and other parties.
The transition plan should address operational responsibilities, employee communication, vendor relationships, technology, records, and other practical matters.
Understand Your Financing Options
Once the buyer understands the business and determines an appropriate purchase price, financing becomes another important part of the process.
Depending on the transaction, financing may potentially be used for the acquisition as well as eligible business assets and other costs associated with the purchase.
A lender will generally want to understand the buyer’s financial position, experience, the pharmacy’s historical performance, and the ability of the business to support its obligations.
Don’t Rush the Decision
Buying a pharmacy can be a significant financial and professional decision.
Taking time to review the financials, operations, employees, contracts, inventory, location, customer base, and purchase structure can help a prospective owner identify potential issues before committing to the transaction.
Professional advisors, accountants, attorneys, pharmacy consultants, and financing specialists can also provide valuable perspective during the process.
Final Thoughts
Buying a pharmacy involves much more than agreeing on a purchase price.
Prospective owners should evaluate the pharmacy’s financial performance, prescription volume, payer mix, inventory, accounts receivable, employees, contracts, location, customer base, competitive environment, and overall operations.
A thorough review can help a pharmacist determine whether the opportunity fits their goals and whether the business has the foundation needed for long-term success.
