The Entrepreneurial Pharmacy Podcast: What is Due Diligence
Before buying a pharmacy, it’s important that you do your due diligence, but what does due diligence look like?
On this episode of The Entrepreneurial Pharmacy Podcast, Ollin Sykes, CPA, CMA, CITP and Scotty Sykes, CPA, CFP discuss everything about Due Diligence.
We share the different types of due diligence, why it’s important to do your due diligence, what information you need to look for, and more!
Tune in to the discussion below
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More Resources on this Topic:
Blog – The Importance of Due Diligence When Buying a Pharmacy
Blog – The Pharmacy Buyers Guide to a Common Stock Purchase
Blog – The Step-by-Step Process to Buying a Pharmacy
If you prefer to read this content, the video transcript is below:
Scotty Sykes: So, you’re ready to buy your pharmacy and you know what you’re buying, whether the stock or the assets. Let’s talk about due diligence. What are some, before you even get going down the road from this point, we got to have some due diligence going on. What does due diligence look like?
Ollin Sykes: Absolutely. Before you decide on that sell price or purchase price or whatever it is that you’re buying either assets or common stock. You need to be asking the seller for certain documents in order to allow your professional advisors who deal in these kinds of transactions to do a deep dive down into the numbers to make sure that the numbers that are being presented to you are accurate, that there aren’t any hidden issues from several years ago that need to be addressed. There aren’t any open item issues with any of the federal state governments, and that the numbers that the seller is asking for can be supported with actual factual numbers in their accounting system. That’s extraordinarily important in determining. Whether the numbers being presented to you are accurate and that you have the comfort level stepping into the shoes of the seller to begin your career as a new pharmacy owner in the transaction.
Scotty Sykes: So, what does it look like when we get, you get the accounting information and you’re picking through that you’re reviewing the balance sheet, you’re reviewing the income statement, you’re pulling the script audit logs things like that, and just verifying those, that financial information you’re given is a very important step.
Ollin Sykes: Yeah, it really is. I mean, we’re, in addition to the things you just mentioned, we’re pulling things like W2s from the last year or 2, 1099s that have been issued. We’ll want to know who’s been paid what. And obviously you need to be interviewing potential employees as a part of the due diligence process to see who it is you want to keep in the pharmacy going forward. Because in some cases there may be family members or friends of the seller that for whatever reason you don’t want to carry forward as the new owner. And many pharmacists that are going through these transitions will make the decision I’ll just keep everything the same and decide six months or a year out whether I’m going to keep these people. We believe it’s best to make the determination up front at the point in time that the transaction is closed. There’ll be less commotion if anybody has to be let go or doesn’t continue. That’s a very important point that has to be considered. Also, you need to be, in addition to the dispensing logs, you need to be looking maybe at the top 10 or 15 third party payers. You need to be looking at the top 15 or 20 drugs that have been dispensed because you don’t want to buy a pharmacy that has been dispensing pretty much all C2s and get into issues with your wholesalers on purchasing going forward. So, this is just partial to the due diligence that needs to be addressed. Instead of just accepting what is being presented to you by the seller and or their representatives
Scotty Sykes: Outside of financial due diligence. What are some other just notable due diligence items that need to be?
Ollin Sykes: Well, walking and working in the pharmacy. I always think it’s a great idea that if you’re buying a pharmacy, you should have, and if you haven’t been working in that pharmacy, it’s great to come in and work for a week or two. Maybe you can fill in for some time off from the potential seller. You get a feel for the patients. You get a feel for the employees, for the operations, for things that you want to change going forward. Some of the subjective decisions that are going to have to be made on top of the financial decisions. But as much as you can know about the pharmacy, it’s locations, it’s demographics, it’s patients, it’s prescribers, it’s numbers, any and all of that will help you be a better leader as the new pharmacy owner upon transition.
Scotty Sykes: And there’s quite a bit of due diligence that needs to happen on the legal side as well from the pharmacy standpoint, from the actual state boards of pharmacy, so on and so forth. That’s where legal expertise can come in and provide those safeguards.
Ollin Sykes: Yes, there’s, lien searches that need to be done, obviously. The State Board of Pharmacy has to be consulted and dealt with because each state has its different rules and regulations with respect to change of ownership. But all those kinds of things need to be dealt with by your legal health care specialist. Not your legal real estate attorney, but your legal health care specialist. And there are specialists in this space, i.e. the pharmacy space, that are specialists in this particular area. And this is one time in your life when you need to reach out and retain those experts in this particular field, especially if you’re using SBA financing for your closing. Which is a very special loan, the SBA 7A loan, which is so often used in the pharmacy industry.
Scotty Sykes: So, about this legal specialty, you don’t want to be using your real estate attorney best friend down the street…
Ollin Sykes: No, you don’t.
Scotty Sykes: For a pharmacy deal.
Ollin Sykes: No, you don’t.
Scotty Sykes: So, seeking out a health care attorney who understands health care, who understands components of pharmacy…
Ollin Sykes: Correct.
Scotty Sykes: Arena, is going to go a long way in terms of value to.
Ollin Sykes: Yes, it is. And you can go to events like the NCPA Ownership Workshop and most of those experts are attendants or reach out to firms like ourselves and we’re happy to give out referrals. We have no conflicts of interest with any vendors we’re dealing with, but we deal with a host of experts in this industry, and we know who the people are that do a quality job in this space.
Scotty Sykes: All right. I guess that wraps up Pharmacy Due Diligence for now part one. I’m sure we’ll have some more into that later on, but appreciate everybody listening.
Ollin Sykes: Absolutely. Have a good day.
