Exploring Multi-Unit Pharmacy Ownership; Buying a Second or Third Pharmacy
By John Pross |
Purchasing another pharmacy can enable community pharmacy owners to achieve professional and financial growth and potentially double or triple their script volume. Expansion may also introduce them to new patients or provide an opportunity to enter new market segments such as long-term care, compounding or specialty pharmacy.
In some situations, it makes sense for an independent pharmacist to start a completely new operation — for example, within a newly built medical office park. However, this will require a solid business plan and an abundance of patience, since it could take years of steady brand growth before achieving reasonable profitability levels.
Buying an existing community pharmacy means acquiring an established business that may already have positive cash flow — or the potential to achieve it with some operational improvements.
Lay the groundworkBefore adding another operation, community pharmacists should thoroughly analyze the profitability of their existing business. What is the current cash flow? Is it operating in the red? Negative cash flow on a single pharmacy will dissuade a lender from financing the acquisition of another location.
The next step is to determine the factors behind the current business’ success and determine how to apply them to a new acquisition.
The quality and capability of pharmacy staff can be a determining factor in the success of many independent pharmacies. Pharmacy owners should consider whether the original pharmacy has a “deep bench” so that some of the star performers could transfer to the new location.
It’s never too early to start establishing relationships with lenders who might provide financing for a second or third pharmacy purchase. Very few independent pharmacists have the resources to buy another store in a pure cash transaction. Most work with banks or specialized pharmacy lenders to obtain the necessary financing. Lenders will require credit reports and financial statements from the current business. Just as important, they’ll want to familiarize themselves with the owner to gauge their responsibility and trustworthiness.
Establishing relationships with lenders now will make it easier for community pharmacists to line up financing quickly if a good opportunity presents itself. Speed can be key to closing a deal. Competition from other potential buyers can be intense as attractive pharmacies with positive cash flow, strong growth potential and/or a great location are likely to sell quickly.
Absentee or hands-on?
The biggest decision independent pharmacists face when considering opening a second or third location is how to operate. There are essentially three options:
- Absentee – An absentee owner delegates the day-to-day operations of the second or third pharmacy to someone else. This could be an employee from the original pharmacy who is ready to advance to a leadership role. The owner might even consider giving the individual an equity stake as an incentive for high performance.
Alternatively, the owner could bring in a partner — a colleague or former pharmacy school classmate. The individual should possess the character, values and work ethic necessary for success at the new location.
The challenge with absentee ownership is that the owner may not identify problems at the new pharmacy as quickly as they would if they were regularly on-site. Still, if the new acquisition is already generating positive cash flow and filling a high volume of scripts, the absentee ownership option will continue to be profitable while the new owner gradually makes changes to operations and work flow.
- Hands-on (Owner Operator)– In this scenario, the owner runs the new pharmacy while delegating management at the original location to someone else. The hope is that the owner has established strong enough procedures, controls and expectations there to keep everything running smoothly.
- Semi-absentee – For some owners, dividing time between each location and managing both is the most appealing option. Theoretically, semi-absentee ownership offers plenty of advantages — the owner will be on-site at the new location to implement improvements and address problems while still spending time at the original pharmacy to maintain operations there.
The challenge is that juggling dual leadership roles can overextend the owner and possibly lead to burnout. Semi-absentee ownership may be feasible for an owner with two pharmacies, but it becomes impractical for those running three or more.
Greater impact on the community, better financial opportunities, but more management challenges
Independent pharmacists want to serve their communities. Owning a second or third pharmacy creates the opportunity to positively impact the lives of more patients by bringing programs and systems that have proven successful in one location and expanding them to a broader audience.
Owning two or more pharmacies can also offer attractive financial benefits. With sufficient patient volume and good operational efficiency, a second or third pharmacy should generate enough gross profit to cover all operating expenses, debt service, and management fees to the new owner and still show an operating profit. The management fee typically is in the range of 1%-2% of revenue which, ultimately, can provide recurring income to the new owner.
Independent pharmacists who own two or more pharmacies should also be able to leverage their increased buying power to achieve economies of scale, lower the cost of goods purchased and increase rebate amounts. All of these steps should help pharmacists widen their gross margins and improve profitability.
Community pharmacists still need to plan carefully before making the leap to expanding operations. While competition from other would-be buyers can increase pressure to make impulsive purchase decisions, conducting proper due diligence is essential. It’s critical to gain a full understanding of the local market, existing or impending competition and community demographics before making an offer.
As community pharmacists try to project future cash flow from a prospective purchase, they should consider the risks associated with any change of pharmacy ownership. Staff turnover at the purchased pharmacy could increase when the current owner sells, which could disrupt operations and lead to attrition among the existing patient base. In addition, a new owner that makes quick and aggressive changes to policy, procedure, operations and workflow may negatively impact customer service and employee relations. Pharmacists purchasing a second or third location should have a plan for retaining and expanding the patient population at their new acquisition.
Successfully moving from operating a single pharmacy to running multiple operations requires community pharmacists to adapt to changing circumstances, but not compromise when it comes to upholding high standards and delivering superior customer service. Multiple-pharmacy ownership is growing from year to year, and in our increasingly competitive marketplace, more independent owners should consider this avenue for enhanced growth potential.
Good Neighbor Pharmacy can help independent pharmacists research, evaluate and finance acquisition opportunities with our pharmacy ownership services. Click here to learn more.