Virtual Mentors for Pharmacy Ownership


Having the desire to go into business for yourself is natural, but the decision to do it, is often more complex. Freedom, flexibility, and greater financial rewards are some of the common reasons pharmacists want to break the chains of corporate bureaucracy and build their own financial independence. But many questions confront a prospective pharmacy owner. NCPA receives hundreds of e-mails and phone calls each year from pharmacists and pharmacy students who want to be pharmacy owners, but either aren't sure where to start or are anxious about where to find the answers to questions they have.

The NCPA Virtual Mentors are a group of NCPA leaders anchored by the Management Committee. The Management Committee changes every year and is asked to review the Virtual Mentor FAQs for content relevance and accuracy. In addition they volunteer their time and energy to respond to new questions that future and current owners may have.

Have a question that you don't see in the FAQ's? E-mail it to info@ncpanet.org with the subject line "Future pharmacy owner" and we'll consider adding it to our bank of questions.

Source: Tootelian and Gaedeke, Essentials of Pharmacy Management. 1993.

Below is a sampling of the FAQs this year's Management Committee has developed. Visit the site regularly to check for the addition of new questions.

Questions and Concerns about Opening/Buying a Pharmacy--Operational

Q: Do I need a business card? What should it say? Look like? What about stationery, business forms and invoices?

A: Yes, it is a good idea to use business cards. Consider business cards for all your key personnel, they are part of the team and this is one way in which you can solidify that connection.

It's possible to order cards inexpensively on the web from companies such as VistaPrint.Com using the design you create during the order process. As far as stationery is concerned, most pharmacists own a PC loaded with a software package that includes a word processing application (Word, Pages, or WordPro) that could be used to create letterhead with your store identification. This saves money, speeds the letter writing process, and creates a permanent record at the same time. Invoices are easily created using a spreadsheet application (Excel, Numbers, 1-2-3). Another option is working with a locally owned print shop; ask about special pricing for buying business cards, letterhead, envelopes and marketing pieces.

Q: How do I train employees? How do I become receptive to different learning styles of employees? How do I determine when and terminate a hire that is not going to work out?

A: One secret (though it shouldn't be a secret) to a satisfying employer/employee relationship is successful employee training. A new employee who clearly understands his or her role and status within the company can be a confident and pleasant worker. Write a job description (it need not be all-inclusive) and maintain a company policies and procedures manual. Your policy is meant to guide employee decisions, the overall goal of your procedures. Your procedures then describe actions or provide instructions for an action in the pharmacy. The person in charge of training new employees should have thorough knowledge of your pharmacy's policies and procedures.

You may want to consider a training period followed by a probationary period. At the time of hire explain that when the probationary period is over the employee will be reviewed on their knowledge of the pharmacy's policies and procedures and the job they have been trained to perform.

For assistance writing a policies and procedures manual consider NCPA's Employee Manual Policies and Procedures Wizard.

Q: How do I prevent employee and customer inventory theft ("shrinkage")? What type of theft prevention systems should I use? What kinds are available in the market? What should I do about a break in during or after store hours?

A: Employee shrinkage requires constant vigilance. 10% of employees are dead honest, 80% will steal if given the opportunity, 10% are stealing from you. Quite often, the most trusted employee is the culprit. The person at the top sets the stage. Everyone is watching what you do. Create only the highest standards and live by them every day, every hour, every minute. All employee / employee-discount transactions should be handled by the highest ranking person on duty. Any items paid by cash should be charged at full retail. Any suspicions can sometimes be confirmed by reviewing items on charge. If, for example, no toothpaste is recorded it could be stolen since it would be less to purchase at the pharmacy than any other retail outlet.

Make certain the security system that detects pilfered merchandise is never turned off electrically even at closing or when closed. Only regularly employed pharmacists should have a key. Each person with a key should have a separate ID number to punch into security when opening or closing. Review printouts for unusual/suspicious times. Re-key all locks every time a keyed personnel change is made. Arrange the Rx department so only pharmacists and techs are in dept and handling Rx drugs, including checking in and packaging returns. No clerks, delivery people, janitorial or administrative personnel should be allowed free access to the prescription department.

All deliveries should be charged before leaving premises and recorded as received on account, if paid. It's advisable to work with an accountant to develop a system for recording third-party receivables on accrued basis and account for all checks on deposit tickets and certified as received by bank. At least every two weeks, randomly follow several third- party transactions from hard copy Rx through bank deposit receipt.

Hidden cameras above cash registers and over Rx counters and down aisles are important. Security Labs time-lapse CCTV cameras record to VCR or DVR. These products are available at RadioShack. You don't need to review the tapes on a regular basis, just when you suspect a situation. One pharmacist caught an employee stealing a pregnancy test in her backpack and another neglecting customers. In addition to fixed cameras above the registers, cameras that are moveable or aimable will help you address trends as they come to your attention. Sometimes the mere presence of a security device, functional or not, serves as a deterrent: "We also had the two towers electronic tag detection system near our front door. They never worked, but judging by the number of empty boxes we found stashed around the store, the thieves were aware of the towers." Also, keep the video surveillance system away from potential tampering.


Q: What should an application for employment look like? What questions can I legally ask and which are taboo?

A: A sample application for employment is available on the NCPA Employee Manual Policies and Procedures Wizard. Refer to www.eeoc.gov for legal concerns regarding hiring and discrimination.

In MOST states, the following employment questions CANNOT be asked of a job applicant:

  • Maiden name
  • Own or rent home
  • Age, date of birth, dates attended school
  • Birthplace, citizenship
  • Nationality, ancestry, race, national origin
  • Gender
  • Marital status/ history
  • Family size/ status, number/ages of children
  • Pregnancy status, childbearing/adoption plans, use or type of birth control
  • Height, weight
  • General medical condition, routine medications
  • Religious/ spiritual preference of beliefs
  • Military/ service record
  • Arrest record
  • Membership in organizations unrelated to job
  • Current/ past financial assets, liabilities, credit

Interviewing Dos:

Ask the right questions:

Is the candidate a generalist or a specialist? Do they enjoy detailed work or varied work? What was a particularly enjoyable part of their last job?

What skills do they have that make them right for this job? If they are applying for a clerk position ask how they might deal with a customer upset with something purchased from the pharmacy. Ask a pharmacy technician about his or her experience interacting with medical office staff or PBM help desks.

What are the candidate's salary requirements?

Can the candidate demonstrate any unique or necessary skills? (typing speed, software proficiency)

Hiring Dos:

  • Verify Employment History
  • Verify State Licenses (as applicable)
  • Request criminal background check (if candidate will be handling controlled substances, remember you can't ask about arrest record; you can ask about drug-related convictions)

Questions and Concerns about Opening/Buying a Pharmacy--Financial

Q: How do I apply for a loan? How do I finance?

A: Prepare a Request for Loan Proposal that includes, but is not limited to, an executive summary letter, history of the pharmacy, area demographics, national and local opportunities, personal resume, pertinent continuing education courses attended, personal statement of net worth, three years of financial statements for target pharmacy, same three years of income tax forms, business plan narrative, five year financial projection with narrative and a personal visit with banker to present the package. Allow lending institution three to four weeks to respond. Negotiate your most favorable deal.

If that seems overwhelmingly simple, look into attending an NCPA Ownership Workshop. Go to www.ncpanet.org and click on 'Events' for the latest schedule.

Q: How much money does it take to start a business? Buy an existing
business?


A: If you ask a banker how much you need to bring to the table, the typical answer would be 25% of the total cash needs for the transaction. By preparing a solid, conservative Request for Loan Proposal, 20% has been acceptable in many past transactions. A customizable sample is available for download on the NCPA website (www.ncpanet.org). Typical assets purchased from an existing business are inventory, fixed assets, and goodwill, if warranted. About 50% of the time, accounts receivable may be purchased but at a discount. Extreme care must be taken that accounts exist, that the balance amount is real and collectible. A better way for a new owner is to start fresh with her accounts receivables. Additional needs include, operational cash (about 4% of annual sales); amount needed to cover buildup of receivables over 90 days (22 to 30 days is the typical amount of time pharmacies have to wait to receive payment for a 3rd party prescription); inventory expansion (30-60 days), if needed; items that are normally or often prepaid, like insurance premiums; organizational expense ($10,000 to $25,000); and ask for a line of credit of 4% of the next year's anticipated annual sales (specify this is to carry no charges unless used, and know the anticipated interest rate). Starting a new pharmacy from scratch demands having sufficient funds realizing it may take six to 18 months before a salary can be drawn and up to five years to get to profitability. The unusually successful may see profitability in as little as six months.


Q: How do I construct a buy-sell agreement? What should I look for? What should I be wary of?

A: Buy/Sell agreements are best constructed by your legal counsel with your interests first so your partner's lawyer must negotiate out items. An exit plan is a must while all parties are in the beginning agreeable mood. Items of health, disability (long or short term), and death must be addressed. Days off, vacation time, personal days, sick days, devotion to this pharmacy, working relief elsewhere, working for a competitor (unless for a short time for his/her health condition), required CE days, and required or chosen conventions attendance. An elder partner may want to gradually approach retirement. Cost of personal items purchased from the pharmacy. How far does this extend? Household members, relatives, friends?


Q: What are some of the perks of ownership? Tax write offs? Free goods? Company owned vehicle, etc.?

A: The best perk of ownership to me, is that I can change the way I do things when and however I want to. Just as an example, if I want to close for lunch, I can. But, I also know the risks and have the responsibility for failures or poor choices.

Although having your own company requires a lot of hours and hard work it also offers many benefits. As far as free goods, there are occasional free goods offers but they wouldn't justify owning a pharmacy for that purpose. They are uncommon and usually things you can do without. I feel that the tax deductions are the biggest benefit. You can write off many expenses that you normally wouldn't be able to. Travel expenses, literature, anything that relates to your business and improving your knowledge for that business. It is best to consult an accountant about all the possible tax deductions and to make sure they are legitimate.

Questions and Concerns about Opening/Buying a Pharmacy—Business Set-Up

Q: How do I find a wholesaler? What should I be looking for? What's the difference? How do I know a good or bad deal when I see it?

A: This depends on your geographical area. It could be that you don't have much choice and have to settle for the one that is available. If you do have a choice, make your preference the primary wholesaler, then pick another for a secondary source. Items are always being "shorted," (out of stock), so you will need another source, if possible. Factors include distance from your store, times of delivery, number of deliveries, method of order entry, dependability, and your cost. To test the better price, ask each wholesaler to submit their price on a list of 50 or 100 items you have chosen, typically the most frequently dispensed items. You may wish to develop a Request for Proposal (RFP) to send each wholesaler asking them to respond to each service area and ask if they have any special services that differentiate them. Include two national wholesalers and one local wholesaler. Allow three weeks for the wholesaler to respond with their proposal to you. Ask competing wholesalers to critique proposals and a pharmacist mentor to help you review the information you've gathered.


Q: What is a buying group? What can they do for me? How do I sign up?

A: A buying group may be structured many different ways. Some are member owned co-ops that distribute revenue in excess of expenses to the individual members. Others, may be operated as for profit entities. The state association in Michigan operates a buying group. Some drug wholesalers also operate buying groups. The main concept is that the group pools its buying power to negotiate better terms or lower cost of goods from manufacturers and other suppliers or vendors. Buying groups often select one or two prime wholesalers to contract. Contact your wholesaler for a listing of buying groups. Your state association may be of help in finding a buying group


Q: What is a buying group?

A: A buying group is an affiliation of independent stores pooling their purchases in order to leverage price in the market place. There are several Group Purchasing Organizations (GPO's) existing in the marketplace today. For example, there are not-for-profit and for profit cooperatives, warehousing purchasing and non-warehouse purchasing groups


Q: What can a buying group do for me?

A: A GPO, depending on the type of group, can help independent storeowners in several ways. One way is by affording them the ability to purchase at considerably lower prices than a single store. Volume purchase incentives. Some GPO's can help stores with their managed care contracts allowing them better reimbursements from third party payers


Q: How do I sign up?

A: Most GPO's have their own paperwork that the store must fill out, listing their NCDPD, DEA, and state license numbers, store name, address, phone, and fax numbers. Depending on the type of GPO, some may require you to pay a fee to be a part of the group.


Q: What kind of insurance do I need for the business? Fire? Flood? Liability? Professional liability? How do I find an insurance agent who can sell me the products I need? How do I know if I'm getting a good or a bad deal?

A: A good comprehensive business liability policy will cover many of the items for which you need coverage. You may wish to add additional personal coverage (Umbrella) and professional liability (sometimes known as malpractice) for civil claims in excess of the normal policy limits. Any business insurance policy should include business interruption as well as extraordinary losses, such as theft of money. Finding an agent will require some due diligence, speaking with colleagues is the best way to get a reference and it is generally wise and good business to put your "book" of insurance business up for a competitive quote annually or bi-annually.

Disability insurance for your key people is also a good idea. Also consider a non-owned auto policy in case employee uses his or her own vehicle for delivery and has insufficient coverage. Also, make certain the professional liability has a no subrogation clause written in the policy. If it does not, insist on a letter from the agent and have the letter updated at least annually.


Q: What about different merchandise lines like greetings cards or collectibles—where do I find out about those? How do I determine if I should get into certain product lines?

A: A source for gift lines and card lines is Giftbeat (www.giftbeat.com). It is a monthly service geared for the gift store/dept owners. It rates gift items/cards by top movers throughout the USA. They rotate the ratings of categories monthly. They also further divide the categories into geographical regions of the US. (Ex. Top reorders, $5 or less, spring/seasonal, gift books, plush, sentiment). Giftbeat is also a great source for new items, how to price gift items, and other marketing ideas. They include information on all companies they list. I find it to be a great source for gift department buying. You can also visit gift stores in your local area to see what type of merchandise they are selling. Note what size department they have for lines and also what merchandise is being marked down.

Quite often you will find "other" business opportunities come to your door as they are always trying to expand their retailer network. Some other lines could be considered traffic builders such as magazines, newspapers, and soft drinks. Look for unique ideas that aren't available on every block. Consider the potential sales per square foot and the staffing costs associated with each new endeavor. We have the luxury/curse of owning a lot of sales floor in a rural community. There are few things we have not tried. Some good, some not so good. Hallmark cards are a recognized quality line but the Carlton cards we carry in our pharmacy out sell Hallmark cards in our adjacent gift store. The terms of sale between competitive vendors is also important. Ask if returns are allowed and at what cost to you. RadioShack even came to us and offered a franchise with the potential gross margin of 35 to 40 percent.

Think carefully about your target audience. Every age and gender category has preferences and things that appeal to them will vary based on those preferences. Who comes to your pharmacy? Will it be a pediatric/teen population or an adult population or a senior population? How does each group like to spend its money? Toys, reading glasses, books, cards? How modest or exclusive are the neighborhood tastes? Do you have a sales staff that can "sell"

merchandise or just ring up purchases on a register? What you really want to do is let your customers find something in your store that they didn't know they needed--a little retail excitement. Good local products, card lines, food gifts, and candy appeal to the local population as well as being able to use them for gift items. Large national brands are recognizable, but often the smaller vendors are more profitable (and they actually want your business!) Check out your competition and colleagues.

Network with other pharmacies at a regional or national pharmacy trade show. What appeals to you and how that would translate to your target audience? Look at the ads in the Sunday papers. Be aware of trends and seasonal items. Start off on a modest scale and then expand in the areas that do well. Attend a regional gift show for informational purposes. Start with a budget and do your purchasing when you get back home. Your customers are your best guide to the type of merchandise you should be stocking in your store."


Q: Is opening a pharmacy in a doctor's building a good deal?

A: Although the prospect of being in close proximity to prescribers is attractive, the decision should be based on the occupancy costs associated with that particular location. In developing your business plan for such a location, you should determine what the prescription capture rate will be. The capture rate can be determined by interviewing the prescribers in the building. Your questions should include the number of prescriptions written daily, types of medications prescribed, whether the patients are able to choose their pharmacy provider, and how many hours per week the prescriber has patient appointments. Identify the number of prescribers, the variety of practice specialties and the number of practices in the building. Note the posted hours of each practice and find out how the prescribers staff those hours. Do any of the practices have urgent care or weekend hours? This information should help you determine how many potential prescriptions are generated from the building. Having determined how many prescriptions are written daily, you can expect to capture as many as 25-30% based on my experience with two medical building practice sites. One final consideration is the physical space. Will you occupy space on the first floor near the main entrance? Does the pharmacy have a separate entrance close to the parking lot? Be sure that you will be able to put out a sign advertising your store.


Q: What is the upside of opening in a medical office building? The cons?

A: The advantages include a convenient working relationship with the prescribers, a somewhat limited inventory that is based on the products used by the prescribers, a comparatively high capture rate for prescriptions, ease of developing referral for pharmacist care services, and limited hours of operation based on the building occupants.
The disadvantages include the lack of parking for non-building patients, the requirement to carry specific inventory demanded by occupants in the building, and above average occupancy costs.


Q: How much should I pay per square foot?

A: Any decision on rent should be based on revenue projections that are affected by the location. Once a projection of revenues can be determined, you can calculate what annual rent can be supported. This percentage of sales line item can be found in the latest NCPA Digest, Sponsored by Cardinal Health. For help accessing the Digest online call NCPA 1-800-544-7447.


Q: Are there other professionals that I need to hire like a lawyer and/or accountant? How do I hire/identify who I should hire?

A: Assemble as an advisory team consisting of an accountant, attorney, banker, insurance agent, an industry related person and a close business-oriented friend. Interview several local accountants to find a good chemistry. If you do your own bookkeeping in-house, interim reports for the previous month should be in your hands by the 12th of each month. If you send items to the accountant for entry, they should be in her hands by the 12th and reports should be back to you in three business days. Personally review all reports for trends within two business days and with the accountant every quarter and financial statements may be required by your banker every quarter. Be certain to have a plan in mind to counter any adverse trends. It is often beneficial for the accountant to have experience with pharmacy.


An attorney is an important member of the advisory team. Interview several to find the right chemistry and perhaps experience in pharmacy. Always best to have your attorney write up documents to protect your interest first and make the opposing party negotiate out items.


Q: Where can I buy fixtures? How much should I pay? What kind/brand is best? Where can I find used fixtures? What about Rx bins? Glass display cases? Will my accountant know how to depreciate my fixtures for my taxes?

A: Fixtures are widely available in most major markets (check yellow pages "Store Fixtures"). Wholesalers, buying groups, and state association offices may be aware of store closings and availability of pharmacy fixtures. Also, most design companies, like Gladson Store Design Group (phone 630-435-2200, discounts available to NCPA members), will also have new fixtures available. I highly recommend the use of design consultants for layout & fixturing consultation. Their experience is well worth their fees. Good used fixtures should be available for 25% of the new price, but they are used. You can also look local; inquire after a carpenter to build shelving as will be expensive to ship or deliver from other retail outlets. Some custom cabinet makers may be comparably priced and utility of the fixtures important. If your accountant does not know how to depreciate your fixtures...better get a new accountant, as this is basic to their profession.

Also research G+M North America for store design. Gabe Trahan from Burlington Drug consults for merchandising/ front end design. Wholesalers have fixture and merchandising resources as well.

Q: What is a closed door pharmacy?

A: This is a pharmacy that does not sell any of its products or services to the general public. Some closed-door pharmacies only service hospice patients and others provide service to long-term care facilities. There are other variations.


Q: Should I open one?

A: If the pharmacy is providing to these types of facilities or patients, the manufacturers may offer a special contract for purchases. There are several buying groups that deal with these types of pharmacies that can give an idea about what the savings could be for the closed-door pharmacy. Geri-Med is one of these that can analyze the benefits for a pharmacy.


Q: How do I know which computer system to choose? How much should I plan to spend? What should I look for? Should I buy through my wholesaler?

A: A pharmacy convention such as NCPA's annual meeting each October is a great place to see several systems up and running. Otherwise, calling other independent pharmacists and surveying what they are using is a good way to get a list of vendors. Make a list of questions to ask the pharmacist user about their system. Also, when you are seeing the various systems, have a standard list that you can ask each vendor. Good customer service response is one of the most important aspects for a software vendor to provide.


Q: How much should I plan to spend?

A: You can spend anywhere from $5,000 to $10,000 for a software system. Then you need to purchase hardware. The software vendor's hardware may be much more expensive than other hardware companies so be sure and check this. However, if the price is not too exorbitant it may be less frustrating to buy all or part of the hardware from the software vendor. This avoids the problem of each vendor saying that the any system problem belongs to the other with you caught in the middle with a system failure.

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