How to Buy a Pharmacy Business Series: Identify Accounting Red Flags
Accounting and tax red flags can be a sign to exercise caution and dig deeper when you are buying a pharmacy. A comprehensive review of the pharmacy accounting and tax records is critical in any purchase. In this video, Ollin Sykes, CPA, and Kathy Blanchard of Sykes & Company, P.A. discuss some of the key areas that they review when advising clients who are buying a pharmacy. The dig into a few of the red flags that can be found and what they mean to a potential buyer.
The first step in any pharmacy purchase is to investigate the financials.
Find out what you need to look at in the first video of our How to Buy a Pharmacy Business Series.
If you prefer to read this content, the video transcript is below.
What are some accounting red flags when looking at buying a pharmacy?
When we take the accounting books and records, typically QuickBooks, if we can use that as an analogy here, we look at the history of both the balance and the P & L accounts. And we literally start looking at that balance sheet and go right down it. We want to make sure that the bank accounts and credit card information is being downloaded and reconciled on an ongoing, periodic basis, not necessarily once or twice a year. That shows good “best practices” in the pharmacy when that takes place.
We’d like to be able to access the third party reconciliation system on the receivables front to make sure that all the deposits that are coming in by way of ACH transfers are being verified and that there’s no outstanding claims over 60 days old, as far as third party adjudicated claims. We like to make sure that there’s inventory adjustments being made periodically either with actual counts or through a perpetual system adjustments, hopefully that the pharmacy has in place. Those are some asset type of issues that we typically like to take a look at. Inclusive of that you could add also a review of the depreciation schedule to make sure that the fixed assets that are listed are in fact in the pharmacy and are usable going forward, especially if the transition is going to occur. Kathy, do you want to talk about some of the liabilities that we take a look at?
We want to look at the accounts payable module in the accounting system and make sure that it is as accurate as it can be. A lot of times we see a lot of old historical transactions stuck in the file. Then credit card reconciliations. That module is available in most accounting software, making sure those credit cards are as accurate as possible. Again, that’s another liability that needs to be addressed.
Looking down a little bit further, we get into payroll liabilities. If you’re using a payroll service, your payroll liability should be pretty straightforward, in that they’re taking your payroll tax payments as they process payroll. Sales tax. Sales and use tax. We want to make sure that if you’re buying the pharmacy itself, that the books and records follow you, that you have good, accurate sales tax filings so that you’re not buying something that has potential audit hazard embedded in it. Knowing what long-term debts and long-term contracts you’re going to be exposed to, again, is very important. Finding out that information ahead of time is going to help you plan for what that pharmacy is going to cost you in the long run.
And when we look at the equity section of the balance sheet, we want to make sure we understand the common equity that’s in place, any equity from a paid in capital perspective that’s been paid in over a period of time. The dividend distributions, both current and for prior years. Typically that’s shown sometimes separately on books or records. That also leads to making sure we have basis information on the shareholders because that becomes a critical issue as we go forward, depending on who it is we’re representing in the transaction. But those are the kinds of things that we would take a look at on the balance sheet before heading into the income statement overview.
Can a potential buyer work through these accounting or tax red flags with the seller or should they just walk away?
Well, obviously it depends on the kinds of issues that we run into. Typically we run into inventory not being adjusted other than once every year, maybe even more frequently or infrequently than that receivables. A lot of times they’re not even listed in the inflammation and the returns marked or crawl. That’s a much larger issue that has to be dealt with. Obviously as mentioned earlier, there might be issues with fixed assets that no longer are in use that are listed on the depreciation schedule and perhaps actively being depreciated. Any and all liabilities, sometimes the liabilities are listed incorrectly. Sometimes principal and interest is posted as the actual payment and principal and interest are not broken out separately. Sometimes there are equity issues and shareholder issues that we see upon the review. But it depends on the kinds of things we run into. And obviously all that leads into the overview on the tax return and sometimes there are tax issues that really require amendments to take place. We have recommended in some cases that these amendments be handled before the closings occur, but, Kathy what other kinds of things can you think about that we need to take a look at there?
Again, as Ollin mentioned, looking at that balance sheet, comparing it to the tax return, making sure you know what’s behind the numbers. But protections can even be put in place by your legal team to afford you that level of comfort.
if you do decide to buy and take on the burden of those red flags, as you put it, you just need to make sure you’ve got the right team in place to address those issues and to make sure you’re protected going forward.
