While working for an independent owner can be a very fulfilling experience for many, one of the most attractive aspects of the independent setting is the opportunity to own a pharmacy. Interest in ownership has peaked and waned over the past 30 years. A significant decline in the number of independent community pharmacies occurred between 1990 and 1997 (NACDS, 2003). From the late 1990s to 2006, the number of independent practices has hovered around 24,000 sites (NCPA, 2007). From 2006 through 2009, the trend marked a decline of independent community pharmacies, reaching a first-time low of 22,728. However, 2010 marked a reversal to this trend, with the total number of independent pharmacies returning to just over 23,000 (NCPA, 2010). This number of pharmacies represents a significant portion of pharmacies in the United States (NCPA, 2010).
Some of the top reasons for wanting to go into business include self-management, creative freedom, and financial independence. Other reasons include (1) not having to answer to others regarding the focus of the pharmacy, (2) being recognized and playing an important role in the business and health care needs of the community, (3) achieving a level of self-fulfillment and pride, and (4) continuing the legacy of pharmacy ownership established by family and/or mentors (Smith, 1986, 1996). Each individual who pursues ownership is driven by his or her own reasons. Once the decision of pharmacy ownership is made, the prospective owner must do the following: identify available pharmacies for sale or suitable locations for a new pharmacy, determine a satisfactory purchase price, evaluate and determine capital needs, and investigate and select the best source of capital (Gagnon, 1996). He or she must determine whether to start a new independent practice or purchase an established pharmacy.
Option 1: Starting from Scratch
Sue is determined to pursue her idea of creating a compounding specialty service. After her discussions with Mr. Burke confirmed his lack of interest, she realized that she has two options: Find another pharmacy that would be interested in pursuing this specialty service or start her own business. Sue decides that despite how well things have been for her at Professional Pharmacy, the time is right to start her own business.
The act of starting a new independent community pharmacy practice in a given community follows a long and rich history. As mentioned previously, a new pharmacy appears for various reasons, ranging from support of unmet health care needs for a particular patient population to taking advantage of a potentially lucrative business opportunity. Starting a new pharmacy, as with any business, requires considerable planning.
A number of distinct advantages are available to an owner opening a new independent community pharmacy. The opportunity to select and purchase each item of this new venture, such as fixtures, equipment, and inventory, is a great advantage. Also, hiring your own personnel, finding a great location, creating sound policies and procedures, and avoiding paying for intangible assets are additional advantages.
One of the intangible assets that requires further attention is goodwill. By definition, goodwill is an intangible asset of a company that includes factors such as reputation, continued patronage, and expertise, for which a buyer of the company may have to pay a premium (Bloomsbury Publishing, 2002). For an independent community pharmacy, specific factors that contribute to goodwill include the prescription files and accounts receivable (Smith, 1996). Since goodwill is related to the profitability of the pharmacy, the most frequently used method to estimate goodwill is some multiple of the annual net profit. The most recent year's net profit generally is considered the minimum price for goodwill, whereas a common value for goodwill is estimated at 1 to 2 years of net profit (Jackson, 2002; Smith, 1996).
If the venture is not planned carefully, the advantages of opening a new pharmacy can turn into disadvantages. There is a greater amount of risk that must be assumed by the owner and an increased chance of experiencing unforeseen events. For one, the lag time between startup and profit tends to be longer. Moreover, the challenge to secure capital is a formidable one.
An individual interested in starting a new business can find a great number of books on the topic. While there are few books that specifically relate to the opening of a pharmacy, the general topics covered in the new business development literature are pertinent to any business type. This section offers a list of steps that can be followed on the path toward independent community pharmacy ownership:
Decide on the type of pharmacy.
Assess the potential market.
Develop a detailed business plan.
Determine the organization's structure.
Identify financing options.
Select a location.
Obtain licenses, permits, and insurance.
Develop a marketing and promotion plan.
Establish the management philosophy of the business.
Decide on the Type of Pharmacy
This question can only be answered by the potential owner. While it seems a very simple question, the answer requires considerable contemplation. As in Sue's case, most individuals have a general idea of what type of business they want to start. For Sue, a compounding specialty pharmacy is her wish. Now Sue must begin to evaluate her idea thoroughly by resolving such questions as
- What products and services will I sell?
- From what base will I derive my customers?
- What skills do I bring to this business?
- Where should I be located?
- Will I have any competition?
Assess the Potential Market
Based on her evaluation of the type of pharmacy she would like to open, Sue has decided that she will start a compounding prescription business in the community where she currently lives. She has had a great deal of specialized training in this area and believes that there is a need for this type of pharmacy in the community. Now she must assess the potential market.
As described in the Chapter 22, Sue must undertake a complete market assessment of the area in which she plans to locate. Some of the questions to resolve include
- What is the potential customer base?
- How many physicians are in the community? Specialists?
- What is the competition? Other pharmacies? Other businesses?
Develop a Detailed Business Plan
It is important that the plan is well thought out and that due diligence is paid to eliminate as much uncertainty as possible when starting a new pharmacy (see Chapter 5).
Determine the Business Structure of the Pharmacy
A decision regarding the legal structure of the pharmacy must be made fairly early in the business development phase. Deciding on the legal structure of the pharmacy is critical to the overall success of the business. Each business venture is unique, and there is no one single ownership structure that suits every situation. The prospective owner should consult with an accountant and an attorney to help select the ownership structure that will best meet her needs.
In general, three legal structures are available to pharmacy owners: sole proprietorship, partnership, and corporation. Table 31-2 identifies some of the unique characteristics of each legal structure (SBA, 2011a, 2011b, 2011c, 2011d; Spadaccini, 2009; Tootelian and Gaedeke, 1993).
Table 31-2. Comparisons between Business Structures ||Download (.pdf)
Table 31-2. Comparisons between Business Structures
Number of owners
Two or more
No more than75 shareholders
No maximum, 1 person LLC permitted in most states
Level of liability
Unlimited, personal liability
Unlimited, all partners jointly liable for actions of other partners
Limits personal liability to the amount invested to the limit of assets of the company
Limits personal liability to the amount invested to the limit of assets of the company
Limits personal liability to the amount invested
Owner pays tax on personal returns
Profits divided among partners; individuals must pay taxes
Profits flow to shareholders; individual pays taxes
Corporation pays tax on profit; shareholders pay on dividends
Flexibility, Profits flow to members; individual pays taxes
Can deduct losses on personal tax returns?
Ability to tranfer ownership
May need consent of other parties
May be limited in order to preserve S status
Generally need consent of all owners
This is the simplest ownership form because the business is owned by one individual. The sole proprietor owns all the assets, receives all profits, and is responsible for all aspects of the business. While the owner receives all the profits generated from the business, there is also no legal distinction between the business and the owner, making the owner completely responsible for any liabilities and debts. This form of ownership is ideal for starting a business (Spadaccini, 2009). However, as a business grows, there are other ownership forms that provide more security to the owner and the business.
By definition under the Uniform Partnership Act, a partnership is an association of two or more persons to carry on as co-owners of a business for profit (Tootelian and Gaedeke, 1993). While seemingly straightforward, partnerships have the potential to be complex. Because of this, it is strongly recommended that a written legal agreement between the partners be executed. The agreement, also referred to as articles of partnership, should outline issues including, but not limited to, profit-sharing, business decisions, resolving disputes, adding additional partners, and dissolving the partnership.
There are two types of partnership for consideration: general and limited. A general partnership entails all partners to divide the responsibility for management and liability, as well as profit or loss (Tootelian and Gaedeke, 1993). In addition, partners are jointly and individually liable for the actions of one another. While this is usually considered the least favorable form of ownership, a partnership can be less complicated than a corporation. For example, a payroll is not required for the partners in this relationship, and this provides for less paperwork and similar tax benefits to a sole proprietor (Spadaccini, 2009). A limited partnership consists of at least one general partner and one or more “limited” partners (Tootelian and Gaedeke, 1993). Limited partners are individuals who provide capital to the business but are held liable only for the amount of their investment. These same individuals are not involved in any of the management decisions or operational issues of the business.
A corporation is a business that is chartered by the state and legally operates as a separate entity from its owners. The Supreme Court defined the corporation in 1819 as “an artificial being, invisible, intangible, and existing only in contemplation of the laws” (Tootelian and Gaedeke, 1993). This means that a corporation can be sued, taxed, own property, and enter into contractual agreements, whereas the owners of the corporation, the stockholders, are protected from liability. The stockholders elect a board of directors to oversee the entity and adopt bylaws to govern the corporation during its existence.
While incorporating a business seems like good move with regard to the limited personal liability experienced by the owners, there are challenges to consider. The complexity of corporations requires a great deal of time and money for the setup and running of such an organization. Based on this structure, operating in accordance with local, state, and federal governments may result in higher taxation and require additional resources.
There are three forms of corporations that most businesses use the S corporation, the C corporation, and the limited-liability corporation (LLC) (Table 31-3). Over 82 percent of “average” NCPA Digest pharmacies identified their structure as a corporation, with one-fourth of those 82% further identifying themselves as C corporations (NCPA, 2010). Overall, the trend toward LLCs is recent because this corporate form is relatively new.
Table 31-3. Summary of Corporation Types ||Download (.pdf)
Table 31-3. Summary of Corporation Types
Type of Corporation
- Limited personal liability
- Corporate losses can pass through to shareholders
- No corporate taxes
- Shareholders and employees do not pay Medicare or FICA on profits/dividends
- Shareholder restrictions
- Employee benefit expenses are included in gross income
- All shareholders must agree to the election of S corporation status
- Deduct 100% of health insurance paid for employees
- Deduct fringe benefits such as qualified education costs, portion of life insurance, and employer-provided transportation for work
- Profits up to $50,000 annually are taxed at lower rate if left in corporation rather than pay higher personal income tax rate
- If corporation loses money, owners cannot deduct on personal income tax
- Corporate taxes on profit
- If profits distributed to shareholders, they must pay personal income tax on dividends
- More complicated and requires close monitoring
- Owners are protected from personal liability as with corporation
- As with partnership, income or losses are reported on member's individual tax return
- In general, fewer restrictions and more flexibility
- Owners experience same self-employment tax treatment as partners and sole proprietors
- States may differ in tax treatment
- Newer corporation form - less precedents
Identify Financing Options
Once the business plan has been outlined and the organizational structure has been selected, the next step for the soon-to-be owner is financing the pharmacy. Some questions that must be resolved include
- What are the financial needs for this venture?
- What type of financing will be best for the given situation?
- Where does one go to obtain capital for such a venture?
Every business has financial needs. These needs vary with the type and individualistic nature of each business. A pharmacy located in an urban area will have different financial needs than one located in a rural area. The buyer must understand the needs of the business venture. These financial needs refer to capital. Capital is wealth, in the form of cash, equipment, property, or a combination of these factors, that can be used in the production or creation of income (Kelly, 1996).
There are three areas of capital need: setup capital, startup capital, and operating capital (Tootelian and Gaedeke, 1993). Each area represents a period of time in the life of a business during which particular activities that require capital are conducted.
Establishing a pharmacy, whether starting new or making changes to an existing business, often requires a considerable amount of capital. The activities that represent the largest initial capital expenditure focus on the physical aspects of the business. The remodeling and renovation of the pharmacy, purchasing of fixtures and equipment, finalizing the building's lease deposit if it is not owned directly, and purchasing the beginning inventory, prescription and nonprescription merchandise, are the major sources of capital expenditure. Most of the other activities in the area of startup relate more to paperwork and attention to detail. Such activities include prepaying insurance and utilities, obtaining the appropriate licenses and permits, and covering the professional fees of hired advisors (e.g., attorneys and accountants).
Having identified a number of financial needs that come with the purchase of a pharmacy, the next step is to identify the type of funding available. Three main types of financing will be discussed: personal, debt, and equity.
Personal financing is just what it sounds like, the use of personal funds to finance the purchase of the pharmacy. It is no different from saving money for that first bicycle, car, or even one's retirement; personal savings is an important type of funding. This type of funding provides the buyer with the best possible funding source because there is no cost or payback terms, the amount can be unlimited, and it is relatively easy to use, whereas the only detractor is that there is a risk of loss (SBA, 2011e). However, in most cases, the buyer will need additional funds for the purchase, setup, startup, or operation of the pharmacy.
A common type of funding for a pharmacy is debt financing. Debt financing can be defined as something of value such as money that is borrowed at interest for a specified period of time (Kelly, 1996). Debt financing provides a buyer with an advantage by allowing him or her to borrow the needed capital without having to share any of the profits with the lender and to keep control of the management of the pharmacy. The disadvantages of debt financing highlight the fact that if something is borrowed, it must be returned. Loans must be repaid, with some measure of interest, over a defined period of time. In addition, the amount of debt incurred is limited by the value of assets and earning record of the borrower (Tootelian and Gaedeke, 1993). Debt financing can consist of either/or a combination of short- and long-term strategies (see Chapter 18).
Used less frequently, equity financing results in the buyer sharing ownership with investors who contribute funds. This level of investor ownership brings with it varying degrees of involvement in management of the business. Depending on the structure of the pharmacy, investors could be recognized as anything from a partner to a stockholder in the business. An advantage to equity financing is the chance to reduce the debt that must be repaid on a particular scale. Depending on the fiscal health of the business, partners or stockholders may or may not receive paid dividends. A significant disadvantage is that ownership of the pharmacy is spread among a larger group of individuals, thus reducing the owner's decision-making abilities (Tootelian and Gaedeke, 1993). Most small businesses, such as a pharmacy, are unable to attract much funding in this manner owing to the risk of small business survivals.
Banks are not the only source for obtaining capital. In fact, establishing an entirely new independent community pharmacy may not be appealing to a bank. Banks view the purchase of an established pharmacy as less risky, but there is no guarantee of obtaining a loan.
The choice of a funding source is critical to the future of a business venture and should be made carefully. The buyer must thoroughly weigh the options regarding the types of financing and the specific requirements provided for by each funding source. Table 31-4 provides a brief list of potential lenders (Kelly, 1996; SBA, 2011e; Tootelian and Gaedeke, 1993).
Table 31-4. Potential Capital Sources for Financing a New or Established Pharmacy Business ||Download (.pdf)
Table 31-4. Potential Capital Sources for Financing a New or Established Pharmacy Business
Risk of loss
Personal, debt, or equity
Can cause problems
Personal, debt, or equity
Flexible, usually good rate
Few, competitive, restricted regarding use
Easy to qualify, no collateral
Small amounts, high interest
Banks/savings & loans
Most common debt source
Hardest to qualify for
Commercial finance companies
More flexible alternative to banks
More expensive, collateral more important
Consumer finance companies
Personal loan, not loan to business; no restrictions on use of funds
High interest, personal collateral, not business
Line of credit, sometimes loans
Terms and conditions, requirements for use as wholesaler/supplier
Small business association
Longest payback time
Complex and competitive process
Can be large amounts
Hard to find, share ownership
The familiar mantra Sue hears consists of three words: Location! Location! Location! The selection of the trade area, as well as the actual physical site of the pharmacy, is a primary factor in determining the success of the business. Sue has already incorporated the idea of location into her planning process by deciding on the type of pharmacy she wants to start and in conducting a market analysis.
Sue must evaluate the location of her pharmacy thoroughly with regard to population, potential customers, competition, physician availability, and community trends ranging from general health to economic issues (Kelly, 1996). To help Sue in accomplishing this task, a number of information resources are available to help analyze her pharmacy's location, including, but not limited to, public libraries; realty companies; utility companies; local, state, and federal documents and Web sites; state and national small business administration (SBA) offices; and individually conducted or contracted surveys, interviews, or traffic counts. Sue is also reminded continuously that this is a process that will be time-consuming and take hard work. She should not depend solely on what the computer provides in the way of information. By putting in the work on the front end, the next steps will be smoother.
Obtain Licenses, Permits, and Insurance
As the owner of this new pharmacy, Sue will need to obtain specific licenses and permits to operate. While local zoning laws, building permits, and standards set by health, fire, and police are requirements that must be met by all businesses in a given community, Sue also must ensure compliance with a variety of state and federal regulations that pertain specifically to pharmacy (NABP, 2011; Tootelian and Gaedeke, 1993). Insurance is of critical importance to a pharmacy. Sue will need to find an insurance agent to help with creating a comprehensive insurance plan that covers events ranging from natural disasters and physical accidents to employee health and workers' compensation. In addition, Sue must examine and acquire professional liability insurance for herself, professional staff members, and the business.
Develop a Marketing and Promotion Plan
How will Sue inform the community of her new pharmacy and the innovative services that she will be offering? Using the techniques and tools provided in Chapter 22, Sue will be able to develop a specific marketing plan to educate the community. Through the use of the local media outlets, such as newspapers, radio, television, and local Web site sponsorship, Sue will be able to execute a specific promotion plan for the new pharmacy. Sue should not focus all her marketing and promotional efforts on potential customers. A critical area for her specialty pharmacy will be the community of health care professionals, ranging from physicians and nurse practitioners to specialty practices such as dermatologists and veterinarians.
Establish the Management Philosophy of the Business
The owner of an independent community pharmacy sets the tone for the business. The owner has been involved in virtually every aspect of the business, from conceptualization and planning to development and completion. As the new owner, Sue will be involved in all aspects of the business. In addition to the potential tools available in print, the experience that she has gained from working in an independent community pharmacy will be even more valuable to the dissemination of her management philosophy.
Option 2: “Why Reinvent the Wheel?”—Purchasing an Established Pharmacy
Sue has worked for Professional Pharmacy for 3 years. As she was closing up the pharmacy one night, Mr. Burke, the owner, brings up the idea that he is starting to think about retirement. He and his wife Helen eventually would like to move into a beachfront property. There they could take out their boat and have a place for their kids and grandchildren to visit. Sue is shocked by this sudden revelation. Mr. Burke reassures her that retirement is in the near future, but he wants to chat about her future career goals and whether those goals might include pharmacy ownership.
For a potential buyer, looking for the right pharmacy may seem like a daunting task. There are a number of places to begin a search. In many cases, the potential buyer already may have identified several businesses either through research or as a result of his or her current job. Local and state pharmacy associations are excellent resources for initial listings and referrals. A common section in the flagship publications of these organizations is a “pharmacy for sale” listing. The journals of most national pharmacy organizations have similar pharmacy listings. In addition, professional brokers who deal on the business side of the real estate market can be contacted and hired. There also exist specialty services provided by organizations. One example of this is the Independent Pharmacy Matching Service (IPMS), found on www.PharmacyMatching.com that is coordinated by the National Community Pharmacists Association (NCPA). The IPMS helps match prospective buyers and sellers on various criteria, including geographic location.
Once a potential pharmacy is identified, an important question to ask is, “Why is this pharmacy for sale?” (Cotton, 1984). Is the owner retiring? Has the neighborhood changed owing to increased competition or economic changes to “sour” the location? Is the pharmacy on the verge of bankruptcy? These are just a few of the many questions that should be asked regarding the pharmacy. These questions reinforce the importance of researching the business and obtaining advice from various sources.
Purchasing an established pharmacy can provide an excellent opportunity to a potential buyer. Identifying the advantages and disadvantages of this ownership alternative will provide valuable insight into an individual's decision-making process regarding ownership (Smith, 1986, 1996; Tootelian and Gaedeke, 1993).
Advantages and Disadvantages
According to many in the pharmacy and business literature, there are a number of advantages to purchasing an established pharmacy (Table 31-5). An established pharmacy already has eliminated a number of the unknowns that face the startup of a new pharmacy. There is a lower level of risk on the buyer's part because the pharmacy has an established history. Pending thorough research and assessment, the buyer should have fewer uncertainties regarding the pharmacy, ranging from the physical facility, inventory, and equipment to the personnel and patient base of the pharmacy. Based on this transfer of ownership, the pharmacy obtains new management while not adding another business to a competitive marketplace. Another advantage is that an established pharmacy provides the buyer with great potential for reducing startup costs and decreasing the length of time between startup and profitability. In addition, the buyer receives the goodwill and reputation of the pharmacy.
Table 31-5. Advantages and Disadvantages of Purchasing an Established Pharmacy ||Download (.pdf)
Table 31-5. Advantages and Disadvantages of Purchasing an Established Pharmacy
Lower level of risk for the buyer
No additional competition added to the current marketplace
Reduced startup costs/less risk
Less time required to show a profit
Buyer receives established goodwill
Business has an established clientele
Business provides buyer with trained employees, inventory, physical facilities, and established relationships area health care providers
Old/outdated fixtures and equipment
Inventory that is too large and/or unsalable
Established policies and procedures do not match with new ownership's philosophy
Inflated sale price
Problems with the location
Undesirable established leases
The advantages related to this method of ownership can just as easily become disadvantages. The established assets, such as facilities and equipment, may be outdated or inadequate to meet the needs of the interested parties. The inventory of the business in question could consist of a large amount of out-of-date and unsalable items or even be too large for the pharmacy to support. The previously established policies and procedures could be in direct conflict with what the potential owner has in mind, thus creating potential human resources management problems. In addition, the pharmacy's location may not be optimal, and the purchase price may be overinflated by goodwill.
During the negotiation of such a transfer of ownership, the careful review of all leases is a critical factor that is often overlooked. A lease refers to a long-term agreement to use or rent a fixture, a piece of equipment, the physical structure in which the pharmacy is located, or the land the business occupies (Gagnon, 1996).
Value Assessment and Price Determination
Once the decision has been made to purchase an established pharmacy and a specific property has been identified, the next step is to determine the value of the business. Prior to a value assessment, the future owner should conduct a thorough review of the external environment of the business; that is, the community in which the business is located.
The predominant method of determining the value of a business is through financial analysis. Chapter 17 discussed the basic principles of financial analysis. In determining the fiscal health of the business, its financial records (income statements and balance sheets) from at least the past 3 to 5 years should be reviewed. From these data, the various facets of financial analysis—solvency, liquidity, efficiency, and profitability—can be determined for the business, and trends can be projected based on the time frame analyzed. A number of financial formulas are used to provide a range of values that serve as a guide for either the buyer or seller to begin the negotiation process (Jackson, 2002). It is important to note that while there is no single formula that must be used, each formula determines the value of the business from various perspectives, providing a range of values that can be used to determine an initial buying or selling price.
Based on the preceding discussion, it should be obvious that determining the value of a business is not an exact science. While a number of established techniques may be used, each business is unique. In fact, the value of a business ultimately is determined through negotiation between the buyer and the seller (Jackson, 2002). The agreed-on price usually will lie somewhere between the initial price of the seller and the initial offer of the buyer. The valuation of a business is based on the assessment of facts about the business, informed judgment, and some common sense (Jackson, 2002).
The next step for the prospective owner is to finance the cost of purchasing the pharmacy.
As was done during the preceding discussion regarding the financing of a new pharmacy, similar questions regarding the needs of the business, the type of financing, and the sources of capital must be addressed for the purchase of an established pharmacy. Whether purchasing an established pharmacy or starting one from scratch, a significant amount of capital will be needed to cover the cost of the venture. In this case, the buyer has a significant advantage over someone starting a new business because the established pharmacy will have lower startup costs and should take less time to begin making a profit.
From a buyer's perspective, various types of financing are available for purchase of a pharmacy. While personal, debt, and equity financing are examples available to the buyer, the main question that must be determined is will the pharmacy be bought outright, or will there need to be some financial arrangement made for purchasing over a period of time. In most cases, an individual buyer would have great difficulty in securing financing to buy a pharmacy outright. With this in mind, the following discussion illustrates a transfer of ownership that provides a win-win scenario for both the buyer and the seller.
A junior partnership provides an opportunity for a buyer to purchase a pharmacy with little or no initial capital and a seller to ease out of ownership and keep the legacy of the independent pharmacy alive in the community (Jackson, 2002). Instead of trying to figure out a way to sell the pharmacy when the owner is ready for retirement, this option allows the current owner to transfer ownership to a buyer, continue to have an income, and prepare for retirement.
The advantages of a junior partnership range from less risk and less initial capital needed by the potential buyer to the continued presence of an independent pharmacy to the economic and health care needs of the community. A junior partnership has disadvantages that are similar to those of any partnership arrangement. However, in this situation, because of the established relationship, the chance for both parties to determine compatibility, and the detailed nature of the agreement, a junior partnership proves beneficial.