Pharmacy Start-up Costs: Leases/Facility Planning

Pharmacy start-up costs can mount quickly if not carefully monitored. It is important to carefully consider the terms of the lease and conduct thoughtful facility planning when opening a new independent pharmacy. In this video, Ollin Sykes, CPA and Bonnie Bond, CPA of Sykes & Company, P.A. share some insights on pharmacy leases and considerations when it comes to balancing the aesthetic of a pharmacy store and cash flow projections. They discuss:

• Why you should get your team in place before negotiating and signing a lease;
• What lease terms to consider and how a personal guarantee can impact you years down the road; and
• How Sykes & Company, P.A. can help independent pharmacies.

You can reduce time to open by choosing the right entity for your start-up pharmacy and setting up contracts with major carriers before opening. Watch Pharmacy Start-Up Costs: Entity Selection and Timing to learn more.

If you prefer to read this content, the video transcript is below.

What are some costly mistakes you see with leasing?

The thing that we hate to hear the most is when we get a new client, they come to us, and the first thing we ask is, “have you signed a lease?” And if they tell us they have already signed the lease, we kind of get that feeling in the pit of our stomach – What do we got here? We get a copy of the lease and we see that they’ve already signed a 10 year lease and they’ve paid too much for it.

It’s really important to get people on your team involved whether it be a CPA, an attorney, all those kind of people on your team from the very beginning, that can help you look at these documents before you sign them and make sure that they’re adequate and that they will work out for a startup. You don’t want to put yourself in a situation where you’re already locked in for such a long period of time, right from the very beginning.

And there are a number of issues with respect to that lease that Bonnie mentioned, attorney being involved in that lease. I think very clearly an attorney who has commercial leasing and experience would be even more important to make sure that they understand all the nuances of those leases. ‘Cause some of the leases we see are quite complicated, quite lengthy, and requires sometimes money upfront and then obviously commitment for a period of time. Keeping in mind that if you’re looking at getting an SBA backed loan through the pharmacy niche bank or through any bank that your lease term is going to have to be at least for the term of the loan. So while we don’t like, and typically that’s going to be 10 years sometimes longer, but we prefer you not have one 10-year lease term, we prefer you have perhaps five, two-year leases that it’s your option you can select to go forward for the next two-year term. We also, a lot of times we’ll notice that on the guarantees that the spouses of the owners sometimes are required to guarantee. And what most pharmacists don’t understand that are involved in a startup pharmacy, is that when you guarantee that loan, even if the entity goes bankrupt after a couple years and you run out of cash and it’s not a success, you still have an obligation personally, on those lease terms for the entire lease and when we see people paying 3,$4,000 a month and more, you take that times 12 months, maybe $36,000 to $50,000 to $60,000 dollars a year times 10 years could be $300,000 to $700,000 over the course of 10 years. That becomes a very large obligation that many people don’t realize they have just signed and like Bonnie says, we get the call that says, “we’ve just signed a lease and we think we need some help, starting our pharmacy. What can you do to help us?”

I think it’s also important that timing is the big key as well, you want to wait and have that lease signed and go into effect as close to opening the doors as possible. We see a lot of times where people they get into a lease and they’re not able to open the store for a year. They pay all of that money and that working capital is going out the door before one script has ever been filled.

And in many times, the owners will be smart enough to have a grace period and sometimes it’s three months, sometimes it’s six months, sometimes it’s longer, where the startup pharmacist does not have to pay lease amounts. However, timing that grace period with your third party contract acceptance from all the players, including those big five that I mentioned becomes a critical issue because you cannot open that pharmacy and tell a patient that comes in “I’m sorry, I can’t fill your script.” If you do most likely they’re not coming back. And that’s just the kiss of death. You do not want to do that.

What other facility planning issues should start-up pharmacists consider?

Some issues that we say once the lease is in place is that most times there’s a shell. Sometimes it’s a new shell that’s just been completed, under construction, sometimes it’s an older shell. And if it’s an older shell, you might want to check to see if you have any asbestos. That’s one nightmare issue that I have heard. It’s come up in a number of situations where the property is either rented or purchased and they learn after the fact that there’s been asbestos either in the ceiling, the tiles, whatever the case may be and you can imagine the nightmare and environmental cleanup issue that you have to get involved in with that, notwithstanding the time aspect and time is money in a startup situation. Because you already signed a contract, you’ve got to go through an environmental cleanup before you can do even the facilities planning and design and leasehold upfits, etcetera. That’s time and time is burning up cash flow and you’ve only got, in most cases, a limited amount of cash flow and equity that you have prepared for the operation of the startup pharmacy. And each month that goes by that you have to hold that back and can’t proceed becomes problematic with that cash. Bonnie, is there anything else that you want to add to that?

I would just add that we also see sometimes where people are spending too much on the outfit, maybe just kind of upscale design. We’ve even seen people from other countries, they have companies from other countries come in and do just very fancy, beautiful, beautiful pharmacy work but I think there’s a fine line there in the very beginning to try to keep it within the confines of a normal situation. Before you’ve even filled a script, we need to make sure the business is going to grow. You can always do those things later as your business is growing and the cash flow is there. But obviously you have to make the space look nice and it needs to be appropriate, but not take it too far.

And I think while you’re going through that facilities planning process, obviously you knew you need to take a hard look at your technology needs. They need to be interwoven into that startup phase. That not only includes your script management system, you definitely want a point of sale system tied in with that. On your scripts management system, you want to make sure you can have perpetual inventory systems. You typically will need multiple point of sale systems, more for multiple registers, etcetera. But all your facility planning as Bonnie mentioned, we see a lot of pharmacies the same day, go out and find the stores that are closing and buy the shelving, it might spend $5,000 or $10,000 or $15,000 and the whole store is complete. And then we’ve seen others as Bonnie mentioned, going to other countries and using high end designers that come in to put glorious, beautiful places and upfits in the structures, spending hundreds of thousands of dollars. It’s crazy. So, you got to limit it. You typically will have limited resources, you need for it to obviously look appealing, it needs to look clean, and it needs to look nice, but you got to do some planning, and you got to use some common sense in this whole particular area otherwise you can burn through a tremendous amount of working capital even before your doors open.