Independent Pharmacy Question

[rogerkassob]

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Currently there is an established independent/LTC pharmacy for sale in Ohio. In 2012, the pharmacy filled approximately 2700 rxs a week with a mix of retail, LTC, and nursing home business. It delivers to 160 nursing homes. About half of the payments are medicaid and medicare and the other half is through other insurances and cash payments. There is not a front end; the only things sold at the store is prescriptions. The gross sales in 2012 were 6.3 million; this number has been steadily rising ever since the business opened in 2003. I just graduated from pharmacy school and I am seriously considering buying this pharmacy, and I have had serious talks with my bank accountant about purchasing it. The asking price is $3.1 million (including inventory). My bank accountant told me that I would be eligible for an SBA loan and the loan term would be 25 years and the interest rate would be 7%. I took all of these values and put them into a loan calculator, and based on that, I would be making monthly payments of $22,000 for 25 years. This is obviously a lot. So what I would like to ask is: how much profit can I expect to take home with me? $22,000 per month is insane, so it is very important to me that I know how much money I will be making.

This is what i figured out:

$6.3 million worth of sales x ~ 20% gross profit= $1,260,000/year

subtract $270,000/year for the business loan

subtract $120,000/year for a full time pharmacist to run and manage the place

subtract $180,000/year for technician pay (six full time techs)

subtract $50,000/year for overhead

= $640,000 take home profit/year

Do I have this down right? And is the estimated gross margin for each script really ~20%?

 

[Ackj]

That's a lot of rx for just two Rph. Especially because you'll be tied up doing business things, and not just lick&stick all day. How many pharmacists do they currently employ?

 

[rogerkassob]

That's a lot of rx for just two Rph. Especially because you'll be tied up doing business things, and not just lick&stick all day. How many pharmacists do they currently employ?

I am sorry. Yes, you are correct. There are currently three pharmacists who work there per shift. One is the owner who does most of the business things and the other two do more of the pharmacy things.

 

[Doctor M]

Currently there is an established independent/LTC pharmacy for sale in Ohio. In 2012, the pharmacy filled approximately 2700 rxs a week with a mix of retail, LTC, and nursing home business. It delivers to 160 nursing homes. About half of the payments are medicaid and medicare and the other half is through other insurances and cash payments. There is not a front end; the only things sold at the store is prescriptions. The gross sales in 2012 were 6.3 million; this number has been steadily rising ever since the business opened in 2003. I just graduated from pharmacy school and I am seriously considering buying this pharmacy, and I have had serious talks with my bank accountant about purchasing it. The asking price is $3.1 million (including inventory). My bank accountant told me that I would be eligible for an SBA loan and the loan term would be 25 years and the interest rate would be 7%. I took all of these values and put them into a loan calculator, and based on that, I would be making monthly payments of $22,000 for 25 years. This is obviously a lot. So what I would like to ask is: how much profit can I expect to take home with me? $22,000 per month is insane, so it is very important to me that I know how much money I will be making.

This is what i figured out:

$6.3 million worth of sales x ~ 20% gross profit= $1,260,000/year

subtract $270,000/year for the business loan

subtract $120,000/year for a full time pharmacist to run and manage the place

subtract $180,000/year for technician pay (six full time techs)

subtract $50,000/year for overhead

= $640,000 take home profit/year

Do I have this down right? And is the estimated gross margin for each script really ~20%?

Avg is 18-20% GP. Ave net is 4%. Your profit you take home will be around 200k a year along with whatever salary you pay yourself. 3.1 million seems like a high price. I would think more in the 1.5-1.75 million range.

 

[pharmalt82]

I am sorry. Yes, you are correct. There are currently three pharmacists who work there per shift. One is the owner who does most of the business things and the other two do more of the pharmacy things.

Do not underestimate the difficulty of the business side. That in itself is a full-time job. Do you know or have anyone that can handle the business side for you? I mean taxes, payroll, inventory, cleaning, etc. all in a tech-savvy efficient manner?

 

[Doctor M]

Do not underestimate the difficulty of the business side. That in itself is a full-time job. Do you know or have anyone that can handle the business side for you? I mean taxes, payroll, inventory, cleaning, etc. all in a tech-savvy efficient manner?

agreed there. 2700 rx a week is a lot. there is a lot to manage there.

 

[pharmalt82]

agreed there. 2700 rx a week is a lot. there is a lot to manage there.

It's not Rx volume you have to worry about. Baseline management is a pain in the ass in the first year, there is a steep learning curve. Technology, a good accountant, and a year's worth of hard work put into becoming a good manager will help you out. You need someone you know will stay with you for a while. See if you know someone smart in your family willing to do this. Yes, I did just say family.

Paperwork, taxes, tech fixing, hiring, law compliance, etc.

Oh, and if you don't have someone competent managing this for you, you're screwed. You won't be able to dispense safely and it will rob you of everything.

 

[Doctor M]

It's not Rx volume you have to worry about. Baseline management is a pain in the ass in the first year, there is a steep learning curve. Technology, a good accountant, and a year's worth of hard work put into becoming a good manager will help you out. You need someone you know will stay with you for a while. See if you know someone smart in your family willing to do this. Yes, I did just say family.

Paperwork, taxes, tech fixing, hiring, law compliance, etc.

Oh, and if you don't have someone competent managing this for you, you're screwed. You won't be able to dispense safely and it will rob you of everything.

Trust me, theres a lot to manage there at 2700 a week.

 

[rogerkassob]

Avg is 18-20% GP. Ave net is 4%. Your profit you take home will be around 200k a year along with whatever salary you pay yourself. 3.1 million seems like a high price. I would think more in the 1.5-1.75 million range.

1. Sorry if this sounds like a dumb question, but how exactly did you come up with 200k? And did you take into account that I would have 2 full time pharmacists working for me?

2. What salary can I expect to pay myself? And how much usually do independent pharmacy owners pay themselves?

 

[coolbreeze87]

Without a significant down payment i would probably walk away if i were you, you've not factored in things such as rent, phones, internet, expense for drivers and fuel, and third party support. Even with a 15-20% gross margin the pharmacy may be looking at making $1,000,000 a year. With rph sal (240k for 2 rphs), 6 techs (180k), 90k for 3 drivers, and you may be looking at spending over 100k a year on phone lines, high speed internet, third party support, and rent you may only leave yourself with about 100k profit after you've made your loan payment. If you are truely considering purchasing this business i would hire an accountant to look over the books with extreme scrutiny. I think the 3 mill price tag is steep for a new grad but possibly appropriate for the business. You may find yourself making the same amount of money as a staff or supervising rph for the next 25 years and not see real money until your 50's depending on your current age.

 

[Doctor M]

1. Sorry if this sounds like a dumb question, but how exactly did you come up with 200k? And did you take into account that I would have 2 full time pharmacists working for me?

2. What salary can I expect to pay myself? And how much usually do independent pharmacy owners pay themselves?

Net profits for pharmacies are in the 2-5% range. That is you net profit after taxes. That does not include any salary you pay yourself.

If you look at the big chains, they have anywhere between 1-4% net. That is why im saying 3.1 million is too much for the asking price. For files and inventory id pay 1.75 million to 2 million for it. No more. Now if he has robots and automation, maybe 2.1 million. You should look at his P and L after you put your earnest deposit in and determine his true profit. I will say if all you are doing are retail scripts and long term care, you will be looking at 15% gross profit with a 2 to 3% net. Throw some compounding in there and you can push that number up in the 6 to 10% net. Good luck!

 

[Doctor M]

1. Sorry if this sounds like a dumb question, but how exactly did you come up with 200k? And did you take into account that I would have 2 full time pharmacists working for me?

2. What salary can I expect to pay myself? And how much usually do independent pharmacy owners pay themselves?

You pay yourself an average salary. Negotiate the price. 3.1 million is 50% of revenue. double what it should be. Offer him 1.25 million. You should pay no more than 25% of his yearly revenue.

BTW, do you have the down payment of 600k required by the SBA as well as the cash infused to sustain the business? The SBA will also require you to have extensive experience for such a large transaction. If you do, best of luck! If you dont, get some experience first with the finances of running a business. Id even get some marketing experience too.

 

[MountainPharmD]

Currently there is an established independent/LTC pharmacy for sale in Ohio. In 2012, the pharmacy filled approximately 2700 rxs a week with a mix of retail, LTC, and nursing home business. It delivers to 160 nursing homes. About half of the payments are medicaid and medicare and the other half is through other insurances and cash payments. There is not a front end; the only things sold at the store is prescriptions. The gross sales in 2012 were 6.3 million; this number has been steadily rising ever since the business opened in 2003. I just graduated from pharmacy school and I am seriously considering buying this pharmacy, and I have had serious talks with my bank accountant about purchasing it. The asking price is $3.1 million (including inventory). My bank accountant told me that I would be eligible for an SBA loan and the loan term would be 25 years and the interest rate would be 7%. I took all of these values and put them into a loan calculator, and based on that, I would be making monthly payments of $22,000 for 25 years. This is obviously a lot. So what I would like to ask is: how much profit can I expect to take home with me? $22,000 per month is insane, so it is very important to me that I know how much money I will be making.

This is what i figured out:

$6.3 million worth of sales x ~ 20% gross profit= $1,260,000/year

subtract $270,000/year for the business loan

subtract $120,000/year for a full time pharmacist to run and manage the place

subtract $180,000/year for technician pay (six full time techs)

subtract $50,000/year for overhead

= $640,000 take home profit/year

Do I have this down right? And is the estimated gross margin for each script really ~20%?

Before you even think of buying a pharmacy you need to understand some basic business concepts. I would suggest talking with Owen at Independant Rx Consulting http://www.independentrxconsulting.com/ they are in Ohio to boot and I bet they've already looked at. The service they provide is well worth the cost.

 

[MountainPharmD]

You pay yourself an average salary. Negotiate the price. 3.1 million is 50% of revenue. double what it should be. Offer him 1.25 million. You should pay no more than 25% of his yearly revenue.

BTW, do you have the down payment of 600k required by the SBA as well as the cash infused to sustain the business? The SBA will also require you to have extensive experience for such a large transaction. If you do, best of luck! If you dont, get some experience first with the finances of running a business. Id even get some marketing experience too.

Dr. M is spot on. Get some experience first or look for a smaller pharmacy. They are asking way to much.

SBA is a good route to go. Most transations will have a portion of the down payment provided through a seller carry back or hold back note. On a transation this large with your inexperience there is no way.

Take something more reasonable like a $1,500,000 a year pharmacy with potential. You should be able to pick this up for around $350,000.