The prospect of buying a pharmacy is enticing to pharmacists for a variety of reasons. The items at the top of the list are; freedom and responsibility of ownership, the chance to practice pharmacy on your own terms, do more to improve the health of your patients, and improve your earning potential. These are all realistic goals when you have your own location, however, the process of purchasing can be complicated and lengthy regardless of how well prepared you are.
1. Keep everything the same
When forming a corporation for your pharmacy, there are a lot of variables to keep in mind. You’ll have to hire an attorney, a CPA, and then choose a business structure: sole proprietor, LLC, S Corp, or C Corp. Your CPA and attorney will have their opinions on which way to go, but make sure to remember one thing: choose a good name! A good rule of thumb is to remember the name on your IRS paperwork will be your LBN, and the name on your state license will be your DBA. We recommend keeping close tabs on how you register for accounts and order items so you don’t have name confusion. We’ve witnessed too many facilities to count that had no idea what their name was! How is that possible? They use one name on their checks, a slightly different name on their signage, another variation on their bags, and a different one on their website. To protect one of my favorite clients, I’ll use my last name in place of their name to show how problematic this was. Templeton Drug, Templeton Drugs, Templeton Drug Store, Templeton Drug Inc, Templeton Drug Co were all used on a variety of places. Why was this an issue? In applying for their Medicare number we needed consistency in their name and nothing matched. It took a lot of time, payroll dollars, and ordering a lot of new pharmacy bags, labels, checks, etc. to get this worked out. So, keep your name the same wherever possible; signage, business cards, website, social media, merchandise accounts.
Once you choose your LBN, (without punctuation) you must apply for your Employer Identification Number (EIN). Once your EIN is set, it’s a pain to change and everything follows what is listed on your EIN. Keep in mind, in most states you can’t apply for your pharmacy license until you’re ready for your state board of pharmacy inspection. You can apply for your DEA license once you have your pharmacy license, but this can be a very slow process. The bottom line is, opening a pharmacy is a complicated undertaking. Any inconsistencies in naming can lengthen that process. Not knowing the proper name or having it listed in different ways between your NPI, NCPDP, state license, DEA checks, etc. will cause problems later.
Bonus thought: Did you know the United States Postal Service address verification tool is used to verify addresses by several entities? Be sure to always list your business address the way USPS lists it. So, if USPS has you listed as 123 N Main St, please use that version on your checks, applications, and registrations. Any document that doesn’t match will be sent back to you, halting the process. The governing bodies don’t care what your timetable is, so make sure to understand the nuances of the process before you dive in.
2. Make sure you can get contracts
When you buy an existing pharmacy, think about the geographical area and the patients who are loyal to the location; who are the primary carriers? What are the larger employers of the area? Can you contact the employers’ HR departments to inquire the name of their prescription drug coverage and ensure you have a contract with that insurer to provide services to their employees? If you don’t think of the paying customers, then you could be on the fast track to going out of business. In order to get contracts, you first have to pick your Pharmacy Services Administration Organization (PSAO). While you can always try to negotiate contracts yourself, it’s much smarter, and safer, to use a PSAO. It’s also important to note that PSAOs work with specific PBMs. Which PBMs do you plan to work with? Some contracts you will have to negotiate on your own, i.e. Humana, Express Scripts, CVS/Caremark. How does this effect the patients in your area? If the health systems in your area work with a wholesaler different than the PBM your PSAO has to work with, patients won’t be able to fill scripts at your pharmacy. If patients can’t fill their scripts at your pharmacy, you won’t get their business. Even if you’re able to switch to a PSAO that can get contracts for your area, the damage can already be done. Once a customer is lost, it can be difficult, or even impossible, to bring them back. Before choosing a PSAO, make sure to understand your market conditions or else your business will be doomed before you even open the doors.
3. Construction delays can happen
Construction delays can be the things nightmares are made of, but they are a common part of the process, especially if you’re building a new pharmacy. If there’s a design flaw, hold up due to inspections, back order on supplies, bad weather, or fixture installation, construction stops until there’s a solution. While these things might not be likely to happen, they do occur often enough. The same can be said even if you’re buying an existing pharmacy. If you want to, or are forced to remodel, you run the risk of dealing with construction delays. Even if you’re able to wall off a portion of the pharmacy so you can still serve patients, delayed construction can impact business. You want patients to feel comfortable visiting your pharmacy despite the work going on.
4. The problem with bad credit
Unfortunately, there’s nothing you can do to go back and change things in your credit history. If you have bad credit, things can be complicated. Any blemish on your record losing a house to bankruptcy 20 years ago or failure to pay student loans, will have a substantial impact.
Can you purchase this location without a bank? Sure, there are plenty of instances where the seller will “self-finance” the cost of the business to the new buyer for a small percentage. But, you will still need cash flow for operational expenses and you’ll definitely need a loan and a line of credit. Keep in mind when you’re working with your bank, they’re going to do credit checks and find any blemish in your credit history, so it’s important to know if this will be an issue up front. There are possible ways to get around this issue, like making a spouse or someone else the owner, but that isn’t always possible or ideal. You will still need a surety bond for Medicare and to participate in a lot of state Medicaid programs as well. Bad credit usually increases the cost of this bond from $250 per year to over $5,000 per year.
5. The cash flow crunch
Opening a pharmacy is an expensive undertaking, and it could take over six months or a year to see a positive cash flow. Failing to handle the cash flow crunch is one of the leading reasons new independent pharmacies fail. Every time you fill a prescription, the customer only pays a portion of the cost and you must wait a few weeks to receive the rest of your money. Planning for this delay in cash flow can mean the difference between failure and success for a new pharmacy. You also have to worry about paying employees and payroll taxes every two weeks. This is where having a good line of credit between $400,000-$500,000 can keep you afloat. Start now, if you are in the planning stage, to establish a line of credit. You may even consider working with your bank to increase your line of credit to account for those first six months or so.
Consider Working with R.J. Hedges & Associates
Every pharmacy sale or acquisition is unique. While you can keep an eye out for some of the more common issues pharmacists run into, it’s impossible to say where a buyer or seller may have an issue. That’s why it’s best to be connected with those who’ve been there before and have seen these issues up close and personal; those who know how to prepare for them and have solutions in case they pop up.
This is where R.J. Hedges & Associates comes in. Even if you have a highly detailed plan in place, you may have setbacks and stumbling points and need someone to help along the way. Over the years, R.J. Hedges has worked with pharmacist, and non-pharmacist owners to ensure their buying processes go smoothly. We can help whether you’re in the thick of the planning and acquisition stages, or working to establish and maintain your new facility and need help with compliance. We are a low volume, fully licensed, certified, and accredited broker.
Contact R.J. Hedges today if you’re thinking of buying a pharmacy. There’s nothing like the peace of mind of having someone walk you through the entire process.
