How to Buy a Pharmacy Business Series: Benefits and Payroll Issues
Payroll related expenses are the second largest expense in an independent pharmacy. A thorough review and understanding of this area is critical in any purchase. In this video, Ollin Sykes, CPA, and Kathy Blanchard of Sykes & Company, P.A. discuss some of the key payroll, benefits and workforce issues that they review when advising clients who are buying a pharmacy.
It’s important to be aware of all the potential issues when buying a pharmacy, including financial reports, inventory and dispensing logs. Watch our How to Buy a Pharmacy Business Series to learn more about all of these aspects.
If you prefer to read this content, the video transcript is below.
Why are payroll and benefits so important in a pharmacy transition?
That’s a good question. Payroll typically is the second most important thing involved in an operation of a pharmacy; in that we believe that gross margin is the single most important issue. Once you get beyond maximizing your gross profit, what you’ll begin to look at are the operating expenses that you have in that pharmacy.
Now, obviously the payroll, you have payroll, payroll taxes, potential payroll benefits, whether it be medical insurance, whether it be retirement plans, whatever the case may be. What we have noticed is that, our high performers have payroll generally speaking, under 10% of total accrued revenues for the W2 payroll amount. Payroll taxes, which is generally FICA taxes, social security taxes, will generally be 0.9%, that’s 0.9% of 1%. Generally, most of the pharmacies we noticed on the medical insurance front, will pay one half of the insurance for the employees only.
In many cases we run into, during transitions, we find where the entire family might be paid for, the pharmacist owner in addition to other benefits, whether it be a 401K, a simple plan, other kinds of retirement plans that are there. But you’ve got to be very cognizant of what those payroll costs are, because you can move the needle on your bottom line by changing a number of these items, during a transition.
Another thing you want to be very careful of is whether you retain all the employee force or not in a transition. You want to ideally interview each and every employee that’s working at the existing pharmacy, you want to make sure there’s a good fit, both from a personality perspective and from other perspectives, but retaining all the employees generally is not a good thing to do. Making the decisions to let employees go later is generally not a good thing to do. The time to make changes is typically when the new sheriff it comes into town, that would be you, being the buyer, in this transition. That’s the time to understand and make the necessary changes in that particular area. Kathy, can you think of other issues that we generally deal with in the payroll area?
Well, making sure that payroll is, is properly addressed as far as payroll returns, making sure those payroll returns have been accurately filed, making sure that your staff that you’re inheriting has been paid properly as far as somebody coming back to you for overtime compensation. Sick leave issues, because you’re inheriting that situation. You want to make sure that you’re protected and that your contract to buy protects you from anything that the prior owner may have done that was not accurate or correct.
An item like a 1099 independent contractor could be an issue too, there.
Yes, we run into that all the time where pharmacies have staff coming in as an independent contractor. They’re providing them with the tools to do the job, they’re telling them when to show up, they’re telling them what to do. Those are three of the 20 questions that the IRS uses in determining whether you have an employee-employer relationship or a contract-laborer relationship. Those situations that you might be inheriting could cost you tremendously in back taxes and benefits that you have not addressed with that contract labor individual. So looking at those situations very carefully, making sure you’re fully apprised of the status of each member in the store prior to the purchase is gonna benefit you tremendously, making sure you’ve got a good cohesive team going into that process. And as Ollin said, addressing the wages of those staff members, as you, the new buyer, hire them a day you take over can save you a tremendous amount of money.