How to Buy a Pharmacy Business Series: Investigate the Financials
In this first video of our How to Buy a Pharmacy Business Series, we discuss why it’s important to conduct thorough due diligence when buying a pharmacy business. Ollin Sykes, CPA, and Kathy Blanchard of Sykes & Company, P.A. discuss the importance of investigating the financials and what records you want to look at before buying a pharmacy. Their recommendations include:
- Review the financials alongside the tax returns;
- Examine the accounting file to see how timely and accurate the accounting is;
- Assess the five-year history of the dispensing logs; and
- Look at outstanding long-term liabilities, leases, contracts and items of that nature.
If you prefer to read this content, the video transcript is below.
What is the danger of buying a pharmacy without first looking at the financials?
Your biggest concern is, do you know what you’re getting when you buy a pharmacy? And looking at those financials and comparing them to the tax return, is going to give you the first indication of what you’re getting and is it worth what you’re paying for.
At the same time however, when you look at the financials you have to make sure that if it’s the accounting file and it should be, that the information in the accounting file is reasonably accurate. We were looking at one yesterday, the idea of it being purchased, and we feel like certain assets listed were not accurate. We don’t have access to the QuickBooks file on this particular case and all we had are some reports. You have to be very careful when you’re getting the “reports,” because you may not have all the information that’s necessary to do the appropriate due diligence in reviewing those financials.
What types of financials do you need to review?
To begin with, the accounting file that you use for the pharmacy, whether it’s QuickBooks, Sage, or whatever the case may be, is the file that we like to look at in our due diligence stage because we can see A) some history, we can see B) whether the information is being entered relatively frequently and accurately, and whether the reconciliations are being kept up. Whether it be on the receivables, the inventory payables, cash or whatever it may be. So, we’re able to monitor that type of information, which is so vitally important to get a flavor on the particular pharmacy. Kathy what would you add to that?
I think we’d also like to get a look at the audit logs and the dispensing summaries. We want to see the volume of scripts that are being processed through this store, whether they’re brands, generics, new or refill. We want to get an idea of the gross profit that the store is able to generate. That gives us a good history over a couple of years, and whether there’s been growth in the pharmacy or whether we’re looking at a decline in the volume of scripts that are being filled at that store.
The one we were looking at yesterday, the dispensing logs gave us a five year trend summary. Obviously we saw a decrease in the total scripts being filled. We saw a dramatic amount of generics being filled, and we saw less than 50 percent of the scripts being new scripts. All those are indications of certain key statistics that we look at during the due diligence phase, and that we want the pharmacy to be growing, we want the generic fill to be relatively high, because margins are typically much higher on generic fills than they are for brands is a for instance. So those are the kinds of things we’re looking at, and obviously we want the trends as far as the scripts being filled, to be positive rather than negative.
What should you think about before you consider buying a pharmacy and how can Sykes and Company, P.A. help?
There’s a number of other things that need to be considered in that process. Income tax returns, for example for prior years. Looking at it over maybe a three or four year period of time, making sure that the tax returns agrees to with the accounting file information. Looking at outstanding long-term liabilities, leases, contracts, things of that nature, that the pharmacy may be involved in especially if you’re considering purchasing the common stock of the entity. We obviously would want to make sure we’ve got good, perpetual inventories in place in that pharmacy. If they don’t have a perpetual inventory, we’ll want to know when that last actual count has been taken and perhaps an update on that count needs to take place. We also want to review the W-2s for the most current year for the employees. Anytime there’s a changeover whether it’s an asset or common-stock situation, some of the employees that were with the former entity we would need to make sure we understand what their skill sets are, and decide whether those employees will be retained with the business or whether they’ll go along with the seller, as he removes himself from the business. We discussed the dispensing logs earlier. The type of drugs dispensed, we want to make sure that the pharmacy we’re looking at purchasing is not an opioid mill. With all the opioid problems in the country today, looking at the top drugs that are dispensed is critical to make sure that we don’t have any issues with respect to that. These are some of the things that we like to take a look at. Certainly not an all-inclusive list, but we do have a due diligence list we provide to our clients that are serious about looking at opportunities. But those are the kinds of things that we have included on that list.
You want to make sure that during that due diligence process that you’ve got a great team on your side. Sykes and Company is here to assist in that process and make sure that when you buy your store that you’re buying at a good price, you’re getting what you expect out of the deal, and that you know what hurdles you’ve got to overcome.