Starting a Pharmacy: What to Consider
Business and Operations
5 activities to successfully launch a new store; 5 mistakes to avoid.
By Chris Cella, R.Ph.
Vice President, Northeast Region
RxOwnership
If you’re eager to open your own independent community pharmacy, starting one from scratch can be faster and less expensive than buying an existing pharmacy. You can move from signing a lease to the ribbon cutting in just six months (but you’ll probably need to operate seven to nine months before you see a positive cash flow).
Go into it with your eyes wide open; independent pharmacy is not a “just build it and they will come” opportunity. You need a well thought-out and detailed business plan, legal and financial advice and consistent marketing. If you’ve worked in an independent pharmacy or served as the pharmacist in charge for a chain, you will have a solid background for running your own pharmacy. But if you’ve just graduated or worked in a hospital setting, experience working in a retail pharmacy and advice from pharmacy mentors will be crucial.
Although it’s a complex process, McKesson’s RxOwnership® team regularly shepherds pharmacy owners through with free advice and resources. Our checklist for starting a pharmacy gives you an overview of the process, step by step. Based on our experience, here are five important tips to put you on the path to success.
1. Tap into Expert Advice
Find an attorney who understands the independent retail pharmacy business, or at least small retail businesses. One of the first steps in starting your business is setting up its legal status. Choosing whether to establish a sole proprietorship, partnership, limited liability corporation, “C” corporation or “S” corporation will affect the finances and operations of your pharmacy. Your attorney will need expertise in — or connections with other attorneys who are experts in — other topics, including healthcare and employment law.
You also need an accountant and an insurance broker, and you may want to consult experts in other fields, including real estate, technology and human services. As soon as you negotiate a lease or buy a lot on which to build, you will need a pharmacy designer to create the pharmacy design plan you’ll use to apply for your state license. To create your own team of expert advisers, ask for recommendations through your network of pharmacy owners, state pharmacy association, state board of pharmacy or wholesaler representative, or look in trade journals or online.
2. Develop Your Business Plan
Potential customers are already going somewhere else for their pharmacy needs, so your business plan will need to answer, “Why are they going to come to me?” In answering this question and developing your plan:
- Analyze the population. Study the demographics of the population and the prescribers in the area. Is there a large enough population to support your pharmacy, and are there enough prescribers for any niche services you plan to offer? RxOwnership can assist you, at no cost, with information about populations and prescribers. Even more detailed information about prescribers is available through McKesson’s Physician Outreach Program.
- Understand customers’ needs. Talk with community members about what they want, and what about current pharmacies in the area frustrates them. Ask physicians what they are having problems doing or getting for their patients.
- Assess the market opportunity. To develop your business plan, you must understand where the pharmacy business currently stands and where it is heading in the next three to five years. For example, if you are opening a store right now, you need to think about how to improve patients’ medication adherence, because that will become a key factor in the future success of independent pharmacies. (See How Health Plans and PBMs Evaluate Pharmacy Performance.)
- Create marketing plans. Marketing is a key and often overlooked area in an independent pharmacy’s business plan. Offering better customer service than the competition may keep people coming back, but it won’t bring them in the door in the first place. Plan from the beginning what will set your pharmacy apart and how you will get people in the store.
- Connect with the community. Meet with HR managers of local businesses to talk about offering an immunization day at their office or a brown-bag lunch lecture on healthy eating. Look for opportunities to reach out to schools, youth sports teams and places of worship.
Once you’ve written your business plan, it should be a living document that you review and update often, especially in the early going. That allows you to ensure you are on track with your plans, make any adjustments and adapt to changing factors that are affecting your business.
3. Choose a Great Location.
For any retail business, a critical success factor is location, location, location. To choose where to open your pharmacy, consider:
- Traffic. Are people who would be ideal customers regularly traveling in this area?
- Opportunity. Are there nearby businesses, such as medical offices, that will provide a constant flow of potential customers?
- Visibility. Will people be able to see your pharmacy, or are there too many obstructions and limitations on signs?
- Access. Can people easily enter and exit? Is there plenty of parking, as well as room for a drive-thru window or curbside service?
- Size. Can your pharmacy grow in this location?
Retailers such as Starbucks and McDonald’s conduct extensive research before settling on a location, so having one of those nearby can be a good sign. An independent pharmacy can thrive near one of the big chain pharmacies, if you set your pharmacy apart with your products and services.
If an independent pharmacy recently closed in an area, you should understand the reasons why. This may present an opportunity to capture customers who were already going to an independent pharmacy and value the service that independent pharmacies provide. However, you will have only about a six-month window to save that customer base.
Also, consider the proximity of other sources of business. For example, if you plan to serve an assisted living facility, you don’t want to be so far away that your delivery costs will be high. Opening in or near a medical clinic can give you ready access to customers as they leave a doctor’s office. However, you need to think about what this might mean for refill opportunities. Is it convenient for customers to come back for refills before they visit their doctor again? Talk with prescribers in the clinic to see if you can collaborate and offer services such as medication therapy management and disease state management.
Although you are just opening, think about what you want to be doing with the business in 5 or 10 years. Balance having room to grow with rent costs and the need to fill space with products.
4. Follow the Money
In your business plan and financial statements, include three types of funding:
- Build-out capital to pay for building the store, renovations, fixtures and other fixed assets.
- Opening inventory financing, to pay for initial products to stock your store. While wholesalers will usually provide favorable terms, remember that you are unlikely to have a positive cash flow for at least six months. (Also note, to plan your opening inventory, your wholesaler can give you a sample prescription medication order for a pharmacy of your size that you can tweak, and a sample OTC order with planograms based on the size of the various departments in your pharmacy.)
- Working capital for day-to-day operations.
Understanding your financial needs will help you determine whom to approach for a loan — a commercial lender, Small Business Administration lender or a wholesaler. McKesson, for example, will provide loans for a build-out.
You may need $300,000 in startup capital, separate from working capital, and lenders typically will want to see a 20% investment from the owner. Keep in mind that one of the biggest reasons new independent pharmacies fail is undercapitalization. Retail pharmacy is a unique business, because when you fill a prescription, the customer pays only a portion of the cost, and you may have to wait 30 to 45 days to receive the rest of the payment from payers. You need to plan for that delay in cash flow.
5. Open Before Your Grand Opening
A grand opening is a great event to show off your new pharmacy, but give yourself one or two months of operating to work out any kinks in your operations first.
Before your grand opening, announce your business with “Coming Soon” advertisements, and talk to businesses in the area that might be able to use your services, from workplaces to long-term care facilities to prisons.
Consider joining the local Chamber of Commerce, and invite the mayor to do the ribbon cutting, which makes the newspaper more likely to cover the event. Local minor league and semiprofessional sports teams also may be available for grand-opening events.
Plan events that will bring in your target customers. For example, if you are aiming for young parents, offer fingerprinting of children with the local police department, or bring in older customers by offering a free diabetes screening and education program. Partner with other businesses in the area, too, by giving away gift cards to a nearby restaurant.
Keep in mind that as you work to open your new pharmacy, you aren’t alone and you don’t have to start from scratch. Health Mart® offers a marketing hub with extensive materials to customize for your pharmacy, and your buying group may have a program to help promote your grand opening.
5 Mistakes to Avoid
- Failing to define your niche and provide a compelling reason for customers to choose your pharmacy. Friendly service isn’t enough. For example, will you be like every other pharmacy in your area, including chains? Or, will you be the only pharmacy in the area to offer free delivery, bilingual staff, compounding, specialty pet medications, or breast-feeding classes and hard-to-find nursing products?
- Undercapitalizing the business by not having enough money to run the pharmacy until there is positive cash flow. Plan to have three to five times the amount of your initial inventory cost for working capital.
- Not allowing enough time. From the time you receive your state pharmacy permit, it can take up to three months to get your pharmacy ready to open. It can take one month just to load your pharmacy system with the information from all the third-party plans.
- Skimping on marketing. Your business plan must include a strategy, resources and investments for marketing your pharmacy.
- Trying to do it alone. Starting an independent pharmacy is a complex process, so take advantage of expert knowledge to guide you. That includes talking with mentors and other contacts with the state pharmacy board and association, the legal and financial experts with whom you are working and the free RxOwnership advisors and resources.
Running your own pharmacy business can be an exciting, rewarding experience. While there’s a lot that goes into getting up and running, you’re not without resources — from planning checklists to location analysis to recommendations on inventory, vendors and technology. Whether you chose to join a franchise like Health Mart or work with other sources, finding the right partners can help reduce your risks and expedite your opening.
Share your best advice for starting a pharmacy below, and read Start-Up Success Stories of pharmacy ownership at www.rxownership.com.