How to Buy a Pharmacy Business Series: What Inventory Can Tell You
When you are buying a pharmacy, the listed value of inventory may not be what it seems. You will want to investigate a seller’s perpetual inventory system and find out what is on the shelf, how much is on the shelf, how it is priced, buying groups used and other matters.
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. Their experience in buying and selling transactions showcases the importance of investigating any inventory issues before you purchase assets.
Due diligence with pharmacy purchases can uncover red flags in accounting, too. Learn about those in the second video of our How to Buy a Pharmacy Business Series.
If you prefer to read this content, the video transcript is below.
Ollin Sykes: The number one item that I’d want to understand is whether they had a perpetual system or not. A perpetual system, chances are, if they are doing cycle counts, has a more accurate depiction of what is on the shelf. If properly managed, perhaps, their cash flow has been enhanced with the proper management of what’s on that particular shelf. And of course, by managing that inventory, they have the ability to use a number of cloud-based systems that are tied directly to the script perpetual inventory systems to optimize inventory on the shelf per NDC. So, whether they have perpetual inventory or not, if they don’t have a perpetual inventory then, obviously in either scenario if the transaction’s financed with a SBA-backed loan, an inventory is going to be required immediately prior to closing by the buyer and the seller. One that’s in agreement with both parties. So what’s on the shelf, how much is on the shelf, how it’s priced, who it’s purchased from, what buying group that you’re involved in, all those kinds of things are important on the inventory. Kathy, can you think of others that we would be taking a look at, or other items we’d be looking at on the inventory side?
Kathy Blanchard: Right, you also want to watch the expiration dates of what you’re purchasing. You want to make sure you’re not buying a whole shelf full of expired drugs. That’s gotten several of our pharmacies into trouble in the past. Making sure that the stock is in date, making sure that you’re not inheriting a nightmare. Especially when it comes to your out front, and some of the stores have tremendous gift inventories where the attic or the second floor or the basement is just full of stuff. Remember if you put it out on the street at night, and nobody takes it, it’s not worth a lot. And a lot of our stores get into trouble by buying out front and gift inventories that are obsolete and have no value.
Ollin Sykes: In a lot of cases, what will happen is the potential buyers will agree with the sellers to buy all their inventory. And the sellers have that inventory either in the basement or in the attic that they have never been able to sell, and they realize they got a lot of their dollars tied up into it, i.e. cash and Benjamin Franklins. And they want to monetize that at closing. And the items are only maybe worth five cents on the dollar, and it may not be worth anything on the dollar. You’ve got to be very careful not to necessarily agree to the seller to purchase inventory that has little or no value whatsoever. Especially as it relates again to out front, gift type inventory. And that seems, as Kathy has mentioned, it seems to be an issue that a number of pharmacists in transition have gotten themselves involved into where they have agreed to previously do certain things, and then in the end they figure out they’ve got a lot of inventory that really has little value that they had to pay a lot of money for. So, those are just a collection of several kinds of issues that we deal with in a transition type of situation.