Independent pharmacy ownership can be a challenging business proposition in today’s highly competitive retail pharmacy market. However, with the proper due diligence, planning and execution, a pharmacist can start a successful independent pharmacy business.
In general, there are three types of pharmacists who decide they want to start their own pharmacy:
- The legacy. This is someone who has ownership in their blood. They are the child or grandchild of a pharmacy owner. They grew up in and around a pharmacy. They are part of the pharmacy succession plan. Or, they are ready to strike out on their own and open their own site.
- The job seeker. This is someone who may be struggling to find a pharmacist position at a regional or national pharmacy chain or who can’t find a position in a city or town in which they want to live. Many are new graduates. So they decide to create their own job opportunity.
- The entrepreneur. This is someone who wants to practice pharmacy their own way. They have the formal education and the experience from working at another site. They may be frustrated with their current work environment and believe they have a better business model.
Five preliminary steps to starting an independent pharmacy
Regardless of why a pharmacist wants to start his or her own pharmacy, the preliminary steps they should take before signing any pharmacy ownership papers are the same. That said, the pharmacist’s ability to take those preliminary steps may vary based on his or her individual situation and previous experience. The five preliminary steps are:
1. Consult peers and colleagues. Like any new business venture, the pharmacist should consult with other pharmacists who have started their own pharmacies. He or she can do that directly with peers or by joining a group like the . The pharmacist can ask about the pros and cons of ownership and what actions other pharmacists took to overcome the challenges of establishing a pharmacy. The pharmacist can take a course on pharmacy ownership or reach out to a mentor for ongoing guidance and consultation.
2. Develop a business plan. The pharmacist should draft a preliminary . Among the core elements of a business plan are: a mission statement, ownership structure, financial plan and projections, a competitive analysis and the pharmacy’s anticipated competitive advantage. This isn’t a “build it and they will come” profession. The pharmacist’s business plan should emphasize how the pharmacy will maintain and improve the overall health status of its patients beyond just filling prescriptions.
3. Assemble a team of advisors. The pharmacist should put together a roster of small business and pharmacy ownership experts who will guide him or her through the regulatory and financial process of starting an independent pharmacy. The roster should include - but not be limited to - accountants, attorneys, financial advisors, insurance agents and, if applicable, franchise representatives. Entrepreneurship and management are not typically offered or taught in pharmacy school. Pharmacists who don’t have those competencies from previous experience must acquire them from other experts.
4. Research and choose a location. This step is much more complex than most pharmacists realize. The threshold question that must be answered is whether the market being considered can sustain another pharmacy. That starts with knowing the competition. Are there other pharmacies in the market? Are they chains or independents? It’s often easier to pull business away from a busy chain site than an independent with loyal customers. What are the demographics of the patient population, and is there a sufficient prescription base of business to sustain another pharmacy? Another consideration is physical space. A site needs to be a sufficient size to allow the pharmacy to grow as the business expands.
5. Evaluate and select financing options. Like any small business owner, a pharmacist who wants to start a pharmacy should pick the financing mechanism that’s right for them. That’s why having a financial advisor is crucial. There are many available, including loans from traditional lenders like banks, the Small Business Administration and suppliers and wholesalers. What lenders are looking for is skin in the game: an initial upfront investment from the potential owner. They’re looking for a good credit score. And, they’re looking for sufficient working capital.
Identifying, correcting and avoiding four common pharmacy start-up mistakes
When working through those five steps, many pharmacists will recognize and ideally correct some of the misperceptions that they had going into the process.
- Upfront financing. The most common misperception or mistake is that they believe they have the financial wherewithal to start their own business. Lenders are looking for a minimum of 20 to 25 percent down before they finance the other 75 to 80 percent of the loan. That 20 to 25 percent down needs to be liquid and available. It can’t be tied up in an IRA or a similar investment vehicle.
- Working capital. Many pharmacists underestimate the working capital it takes to run the pharmacy. Like all small businesses, an independent pharmacy has to pay rent, utilities and payroll. Unlike other businesses, they have inventory - specifically drug inventory - that sits on a shelf until someone prescribes it. And, they don’t get fully reimbursed until a health plan pays a prescription drug claim. A minimum of nine months of working capital is required, ideally 12 to 15 months. The bottom line: A pharmacist must have enough working capital to cover the pharmacy’s expenses until it begins to generate a profit.
- Management or retail experience. Another common start-up mistake by pharmacists is assuming that they have enough management or retail experience to start and run a pharmacy. More often than not, particularly for new pharmacy school graduates, they don’t. They didn’t have management training in school, and they never worked in a retail pharmacy setting or any retail setting. They have no idea how a small business works, including the basics like payroll, human resources, sales and inventory. As the owner, the pharmacist ultimately is responsible for everything. Again, that’s why building a team of external advisors is critical.
- Marketing plan. Another common oversight is the lack of a marketing plan or an insufficiently funded marketing plan as part of the prospective owner’s overall business plan. Many pharmacists will say they’re great at customer service. That’s good for keeping patients in the pharmacy. That doesn’t necessarily bring customers into the pharmacy. They need to have a plan to drive customers into the pharmacy more effectively than their competitors.
The final checklist before the grand opening
Once a pharmacist works through the five preliminary steps and mitigates the four common mistakes, he or she is ready to take the final steps toward the grand opening of the new pharmacy. Those final steps include, but are not limited to:
- Arranging and finalizing financing
- Purchasing liability insurance for the pharmacy
- Designing the physical layout of the pharmacy
- Signing reimbursement contracts with payers
- Ensuring that all appropriate licensing is in place
- Selecting a pharmacy management system
- Lining up a drug distributor
- Setting up the store and procuring inventory
- Hiring pharmacy personnel
Without the necessary due diligence steps and the proper preparation, reaching those final steps won’t happen. But the pharmacists who make it to their grand opening will put themselves in a great position to succeed as independent pharmacy owners.
Related: Read more about Web2pro’s services to buy, start or sell an independent pharmacy