Pharmacy Owner Compensation: How Should Owners Pay Themselves?
Owning an independent pharmacy can provide pharmacists with an opportunity to build a business while earning income from their ownership interest. However, determining how much to pay yourself and how to structure that compensation can be more complicated than simply choosing a salary. For pharmacists considering pharmacy practice financing, understanding owner compensation can also be an important part of evaluating the financial performance of the business.
Owner Compensation Is Different From Employee Pay
A pharmacy owner may perform several different roles within the business.
An owner could work as a pharmacist, manage employees, oversee purchasing, handle financial decisions, develop relationships with healthcare providers, and manage the overall business.
Because of this, the owner’s total financial benefit may come from more than a traditional paycheck.
Depending on the business structure, compensation can potentially include:
- Salary or wages
- Bonuses
- Owner distributions
- Business profits
- Retirement benefits
- Other legitimate business benefits
The appropriate structure depends on the pharmacy’s entity type, tax situation, financial performance, and professional advice.
Start With the Pharmacy’s Financial Performance
Before determining how much to take from the business, owners should understand what the pharmacy can reasonably afford.
Revenue alone does not determine how much an owner should receive.
Owners should consider:
- Gross profit
- Operating expenses
- Payroll
- Inventory requirements
- Debt payments
- Taxes
- Working capital needs
- Cash reserves
A pharmacy generating substantial revenue may still have limited available cash after paying for inventory, employees, rent, technology, debt, and other operating expenses.
Separate Salary From Business Profit
One useful way to think about owner compensation is to separate payment for work from the financial return on ownership.
If an owner works as the pharmacist-in-charge, for example, part of the owner’s compensation may represent payment for performing that role.
Any remaining business profit represents a return associated with owning the company.
Keeping these concepts separate can make it easier to evaluate the underlying profitability of the pharmacy.
Consider the Value of the Owner’s Work
An owner who works full-time in the pharmacy is providing labor to the business.
The pharmacy should be evaluated based on what it would cost to replace those responsibilities with qualified employees.
This can be particularly important when analyzing profitability or preparing a pharmacy for a future sale.
Owner compensation that is substantially above or below market compensation can make the business’s financial statements more difficult to interpret.
Don’t Automatically Maximize Your Pay
A pharmacy owner may be tempted to take as much money from the business as possible.
However, maximizing short-term personal income is not always the best strategy.
A pharmacy may need cash for:
- Inventory purchases
- Unexpected expenses
- Equipment replacement
- Technology upgrades
- Employee compensation
- Expansion opportunities
- Debt obligations
- Future investments
Maintaining adequate business liquidity can be important for keeping operations stable.
Consider the Pharmacy’s Cash Flow
Cash flow should be considered before increasing owner compensation.
Independent pharmacies can have significant amounts of money tied up in inventory and may experience timing differences between purchasing medications, dispensing prescriptions, receiving reimbursement, and paying operating expenses.
This means a profitable pharmacy may still need to carefully manage the amount of cash available for owner withdrawals.
Owner Compensation Can Change Over Time
There is no requirement for an owner’s compensation to remain identical every year.
A pharmacy experiencing strong growth may eventually be able to support higher compensation.
Conversely, an owner may need to temporarily reduce personal withdrawals during periods of weaker reimbursement, higher expenses, unexpected repairs, or major investments.
The compensation strategy should reflect the financial condition of the business.
Consider Taxes and Business Structure
The way an owner receives money from a pharmacy can have different tax consequences depending on how the business is structured.
Sole proprietorships, partnerships, S corporations, and other entity structures can have different rules regarding owner compensation and distributions.
Because tax treatment can be complicated, pharmacy owners should work with a qualified accountant or tax professional before changing their compensation structure.
Think About Retirement Contributions
Owner compensation can also be connected to long-term financial planning.
Depending on the business structure and retirement plan, owners may have opportunities to contribute to retirement accounts through the business.
This can allow an owner to build personal wealth while continuing to operate the pharmacy.
Retirement planning should be considered alongside salary, distributions, taxes, and the owner’s broader financial goals.
Reinvesting in the Pharmacy Can Create Value
Owners do not necessarily have to take every available dollar out of the business.
Reinvesting profits into the pharmacy may create opportunities to improve the business.
Potential investments could include:
- Technology
- Equipment
- Store improvements
- Additional staffing
- Clinical services
- Inventory improvements
- Marketing initiatives
The right investment depends on the pharmacy’s market, financial position, and strategic goals.
Owner Compensation and Pharmacy Valuation
Owner compensation can also affect how a pharmacy is evaluated when it is sold.
Buyers and lenders may need to understand the difference between compensation for the owner’s work and the economic benefit generated by ownership.
For example, an owner who pays themselves substantially more or less than the cost of replacing their role may require adjustments when analyzing the pharmacy’s normalized earnings.
This is one reason accurate financial records and consistent compensation practices can be valuable.
Multiple Owners Require Additional Planning
Compensation can become more complicated when multiple pharmacists own a pharmacy.
Partners may have different responsibilities, hours, and levels of involvement in the business.
Owners should establish clear expectations regarding:
- Salary
- Bonuses
- Distributions
- Work schedules
- Management responsibilities
- Profit allocation
Putting these arrangements in writing can help reduce misunderstandings between partners.
Don’t Use the Business as a Personal Bank Account
Mixing personal and business finances can make it harder to understand how a pharmacy is actually performing.
Owners should maintain appropriate separation between business expenses and personal expenses and properly document transactions.
Good financial records can make tax preparation, financial analysis, financing, and a potential future sale easier.
Review Compensation With Your Financial Team
Owner compensation should ideally be reviewed as part of the pharmacy’s broader financial plan.
A pharmacist’s accountant can help evaluate tax considerations, while a financial advisor may help with personal wealth and retirement planning.
If the pharmacy has significant debt or is preparing for an acquisition, expansion, or refinance, the owner may also want to consider how compensation affects the business’s overall financial position.
What Is a Reasonable Pharmacy Owner Salary?
There is no single salary that is appropriate for every pharmacy owner.
APhA’s Community Independent Owner profile reports that total annual compensation, including discretionary profit such as salary and bonuses, can vary substantially among independent pharmacy owners.
The appropriate amount depends on factors such as the pharmacy’s profitability, size, prescription volume, owner responsibilities, location, staffing structure, debt obligations, and business goals.
For that reason, owners should focus less on finding a universal salary number and more on developing a compensation structure that makes sense for their particular pharmacy.
Final Thought
Pharmacy owner compensation should balance the owner’s personal financial needs with the financial health and long-term goals of the business.
Rather than simply taking as much money as possible from the pharmacy, owners should consider salary, distributions, taxes, cash flow, reinvestment, retirement planning, and the value of the work they perform.
A thoughtful compensation strategy can help an independent pharmacy owner benefit from business ownership while maintaining the financial resources needed to operate and grow the pharmacy.
