The Bottom Line Pharmacy Podcast: The Ultimate M&A Guide for Pharmacy Owners in 2024 and Beyond Featuring Alfonso Zambrano, Esq. Partner with Brown & Fortunato

Think you’re ready to buy or sell your pharmacy? You’ll want to tune in to this episode. 

In this episode of The Bottom Line Pharmacy podcast, Scotty Sykes, CPA, CFP and Bonnie Bond, CPA welcome Alfonso Zambrano, Esq. Partner at Brown and Fortunato, to discuss:  

• The current state of mergers and acquisitions (M&A) in the pharmacy industry. 
• Insights into the legal aspects of buying and selling pharmacies. 
• Impact of recent industry challenges on M&A activity. 

And much more! 

Join the discussion with us. 

ASK A QUESTION

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More resources about this topic:  

Schedule an Rx Assessment

Podcast – The Pharmacy Ownership Podcast

Podcast – What Is Due Diligence

Blog – The Importance of Due Diligence When Buying a Pharmacy

Podcast – Preparing to Sell a Pharmacy

If you prefer to read this content, the video transcript is below:

Scotty Sykes, CPA, CFP®: All right, welcome everybody to another episode of The Sykes Bottom Line Pharmacy Podcast. Today we have partner of Brown and Fortunato, a partner, Alfonso Zambrano. Did I get that right?  

Alfonso Zambrano: That’s perfect, you got it. 

Scotty Sykes, CPA, CFP®: Yep, I got it, I got it. Welcome, Alfonso. Always a pleasure to speak with you, have you on the call and yes. 

Bonnie Bond, CPA: Hey, I just noticed something. There’s golf clubs in the background. Do you play golf, Alfonso? 

Alfonso Zambrano: I do. I have my golf club’s over here and I got my master’s flag up here. 

Scotty Sykes, CPA, CFP®: Those golf clubs look like some antiques over there. 

Alfonso Zambrano: Those are. Those are antiques. They’re the old wooden golf clubs that a friend of mine…  

Scotty Sykes, CPA, CFP®: Classics. 

Bonnie Bond, CPA: Have you ever played against Scotty? 

Alfonso Zambrano: I have not. Scotty hasn’t invited me yet. He’s not invited me yet. Shame on him.  

Scotty Sykes, CPA, CFP®: Hey, you’re the one getting tickets to the Masters over there. 

Alfonso Zambrano: That was a gift. That was a gift. 

Scotty Sykes, CPA, CFP®: Nice. 

Bonnie Bond, CPA: Hey, you came to Edenton a while back. You should have taken him to play golf. 

Alfonso Zambrano: That’s right. I know. Next time. 

Scotty Sykes, CPA, CFP®: Hey, I’m always down for some golf, so just let me know. 

Bonnie Bond, CPA: The last trade show we went to, we had a day off and Scotty went to play golf, and we didn’t see him all day. He canceled dinner with the group and everything. 

Alfonso Zambrano: Hey, those are the best. Those are the best days. I don’t blame you. 

Scotty Sykes, CPA, CFP®: You’re on your own. 36 holes. 

Bonnie Bond, CPA: He was supposed to come, but he kept playing. Just kept playing. Anyway, sorry to switch it up. 

Scotty Sykes, CPA, CFP®: If I wasn’t doing pharmacy, accounting, and tax, I would be a golfer. 

Bonnie Bond, CPA: It didn’t work out, so here you are. 

Scotty Sykes, CPA, CFP®: That didn’t work out, so here I am. Well Alfonso, thanks again for getting on. Now we work with you Alfonso and of course Brown and Fortunato. We have a great relationship with you guys and we have a lot of mutual clients. We thank you for what you guys do for our clients in the industry of course. But Alfonso, you work a lot on the M&A – Mergers, Acquisitions or Buy-Sell space. 

Bonnie Bond, CPA: Yeah, and then this morning I think I read another 100 Walgreens stores were closing again.  

Scotty Sykes, CPA, CFP®: I think it’s 1200, isn’t it? Yeah, it’s like a ton. 

Bonnie Bond, CPA: Is it 1200? Maybe I missed a zero a lot.  

Scotty Sykes, CPA, CFP®: Yeah. 

Bonnie Bond, CPA: And there’s already been a lot of big box closures. So I would imagine my guess is that you’re going to say the transition business has been steady. 

Alfonso Zambrano: Yeah, yeah. So yes, I think this year, the first half of the year was much slower than we anticipated because of all of the issues you’ve articulated. DIR fees and reimbursement rates are just not great. So, I think for a lot of the independents, it’s just tough. It’s a tough market unless you’ve got some really good rural rate contracts. It’s just low margins. Now, I’ll back up a little bit. I’ll say pre-COVID and COVID and right after COVID, it was booming, right? COVID and post-COVID, you had all the money from the government. You had all these SBA loans you had add PPP, EIDL. People wanted to make deals, low interest rates. And we were probably underwater at that time with deals. Had a full pipeline and the client mix at that time was everybody. It was first time buyers or it was independents who were opening a third or fourth branch and it was the big box and it was private equity. So, everybody was playing in the sandbox at that time. I would say pretty much all of ’23 and the first half of this year, huge decline in just M&A activity in the pharmacy world because of all of the industry specific issues. Now the second half of 2024 has gotten busier and what we attribute this to from our perspective is a couple of things is you’ve seen a couple of decreases on interest rates, right, which is good. And for some reason, every election year we get busy in the M&A side, right? People are uncertain who’s gonna be in the White House in January, and they’re uncertain if there’s gonna be changes to the tax code that will be retroactive to January 1 of 25. So, if you have a combination of lower interest rates and some uncertainty on the political side, you have baby boomers who are ready to exit now and say, hey, I don’t want to deal with the uncertainty. And buyers can get good loans with some decent interest rates now, so I’m out of here. And then you have others on the buy side who are looking for those opportunities and trying to get good deals because there are sellers out there. So that’s a long-winded way of saying that it was slower the past year and a half. But probably from mid-year to now to the end of the year, we’ve had a steady stream of acquisitions. And again, it’s the same mix. It’s buyers, sellers, selling a big box, selling to independents or some private equity backed transactions. 

Scotty Sykes, CPA, CFP®: I’ve also seen a lot of kind of fire sales, if you will, with the DIR Fee Cliff, pharmacies that those owners who were kind of oblivious to what was coming got hit with it, you know, what’s going on. I can’t deal with this. They get out, you know, just get me out of here. So, I did see a few of those. I don’t know if y’all saw some of that going on.   

Alfonso Zambrano: Yeah, yeah, you’re exactly right, Scotty. think there’s been two buckets of fire sales. The first bucket is DIR fees, reimbursement rates, just dealing with trying to run a business and not have to have these clawbacks take your money out your pocket. So that’s the one bucket. The second bucket that I’ve seen has been an aftermath of the post-COVID acquisition. It’s been a lot of people who are not meeting their loan covenants with their lender. They got these SBA loans to buy. They did great for a couple of years. Now because of DIR or other issues, they can’t make loan payments. So, I’m getting a lot of phone calls about, need to restructure my debt. I need to reorganize. I need to negotiate with the lender. Or the worst case is the bankruptcy. We’ve had a couple of transactions where we helped a client buy assets out of a bankruptcy because that pharmacy just could not handle the debt load that they obtained during COVID.  

Scotty Sykes, CPA, CFP®: Yeah. And when I’ve seen that it’s because the pharmacy, they way overpaid for the pharmacy when I’ve seen those instances. I’m sure there’s exceptions to that, but. 

Bonnie Bond, CPA: And then a lot of the loans on adjustable rates and they’ve just killing people on that. Last couple of years. But Alfonso, I think you’ve done some of the NCPA ownership workshops. I think you filled in for Jeff once or twice maybe… 

Scotty Sykes, CPA, CFP®: Some big shoes to fill. 

Bonnie Bond, CPA: What’s interesting. yeah, sure. We love Jeff. You know, we’re getting ready to do one next week. But I was telling Scotty not long ago, every time we’ve done these, and Scotty filled in for me a couple months ago, too, and there’s still a bunch of eager, you know, people coming out of pharmacy school ready to buy and they’re doing it. I mean, I work with a lot of startups and a lot of transitions, purchases, there’s crew’s out there ready to go too. So, it’s an interesting dynamic with all these factors for sure. 

Alfonso Zambrano: Oh yeah, no, I enjoyed speaking with Jeff at those workshops and you’re right, a lot of it is you have some eager either young pharmacists or they’re out of school or they’re working at a big box and they wanna do their own thing and they see that they can implement certain tactics to do it on their own and be better, right? And so that’s probably the most exciting and that’s probably our favorite client are those eager entrepreneurs who need help on the legal side getting the deal done because you can get creative on structuring financing or structuring the purchase agreement to give them the best benefit of the bargain. And again, and you guys know this too, you have this, the silver tsunami, right? You have all the baby boomers who are getting ready to retire. And if they’re not leaving their businesses to their kids, they’re selling to third parties. So, the opportunity is there and it’s just navigating, you know, the landscape of all of the regulatory issues to find that niche. Now, what I don’t want to do is I don’t want to be doom and gloom. I will tell you, I’ve helped a lot of our long-lasting clients who are multi store owners buy up more and they’re blowing and going, and they’ve got a system, they’ve got their people. So, although you hear all the negative things on the news, Walgreens closing, independents can’t make money. There’s another side of the story where there’s a lot of success in the pharmacy world. And I don’t want to have that, you know, overseen by some of the sadder stories we see nowadays. 

Bonnie Bond, CPA: Yeah, I’m glad you brought that up. Scotty and I just had a conversation about that last week. I was kind of being a little doomy gloomy and he was like, hold up. He’s like, we don’t want to talk about that so much because honestly, truly, and it was a great point. I mean, I can look at the clients that I work with, and I’ve got many that are doing fantastic. I mean, their gross profit is great. And yes, like you mentioned, rural rate contracts, people that have these different 340B opportunities. There’s definitely people that kind of have an upper hand a bit, but then I have some that don’t have any of that. They just have diversified revenue. They found their niche. They’ve done special things, whatever they’ve had to do to get out there and make it work for their pharmacies and they’re killing it too. 

Scotty Sykes, CPA, CFP®: The ones killing it right now have a common denominator and that is they got some form of revenue coming in that is niched and that is profitable for them. And that could be simply 300 – 400 long-term care at home beds or at home, or it could be the compounding, or it could be whatever. They’ve got something and they got a good foothold on it and they’re pushing money to the bottom line.We said this years ago. This is nothing new. This was coming. mean you cannot fill scripts. We’ve been saying this for years. And not just fill scripts. And it’s really, you know, with the change in DIR Fees and reimbursement, it’s really it. So, it’s no surprise really, but…That being said, there’s that whole opportunity out there and these multi-store owners, these ones who know this are jumping on it and they see that. But you mentioned structure and deals Alfonso, I guess kind of go in if I’m looking to, maybe I’m looking to acquire a store, I’m a new, I was working at a big box. Walgreens is closed and I wanted to control my own destiny here. I want to purchase this, you know, independent down the street. Kind of walk us through that from your side, the legal side of it and getting that deal through for a new owner out there.  

Alfonso Zambrano: Yeah, yeah, sure. So typically what happens is we’ve got a client who’s looking to acquire their first or it’s an independent down the street. We like to get engaged on the front end to help them think through some of the terms that they’re going to want to include in their offer letter, letter of intent. And so, we’ll have some conversations with the client, say, “Ok, what are you looking for here? Are you looking to buy them out and start hiring employees? Are you wanting to relocate? What’s the long-term goal? Let’s not be so short-sighted just to say we want to buy and start operating. What’s the plan after that? Three, five, ten years.” That way, when they have that kind of perspective, they can better align their intent with the purchase. So, we’ll ask them some creative questions to kind of get the juices flowing. And then we’ll get the deal terms. And usually, it’s in conjunction with people like you, with their CPAs who have helped prepare the valuation. And we’ll prepare the letter of intent that outlines the terms of the transaction. We’ll help them present that to the seller. And then we’ll walk through those negotiations to get it executed. And really, once the letter of intent’s executed is probably when we start our work in earnest because at that point our job as the advisor and the attorney is to protect our clients. So, in this scenario, the buyer, right, we’re trying to figure out are there skeletons in the closet that we don’t want to assume? Are there issues with the building, with the employees, with the billing procedures? So, we help them do a very in-depth process regarding diligence to ask all of these questions. And as we gather that information, we utilize it to then draft the purchase agreement and protect the buyer from those risks. And ultimately, what we’re trying to do is get the best deal for the client, the buyer, while limiting their risk post-closing. So, you got your LOI, due diligence, and then the drafting of the agreements. And then once you completed all of those tasks, you can work with the buyer’s other advisors to pick a closing date and get to that final finish line, which I call it a finish line and you guys know, it’s not a finish line. 

Bonnie Bond, CPA: I was getting ready to ask you, how long does it take to close? I know you hear that. man, we’ve worked on some fun ones over the years. I’ve definitely learned that you never know. I mean, even the prettiest, you know, easiest, seemingly easiest situation can end up taking a year and a half if things don’t work out between the parties. 

Alfonso Zambrano: That’s right. That’s right. Well, and if you’re the buyer, right, the finish line is the closing, but that’s your new career. That’s your new life. So there’s going to be ongoing advice needed from all of your consultants and advisors to operate the business and implement procedures. For our role, we’re really focused on, number one, we don’t want to jeopardize the deal as attorneys. We don’t want to ever be in a position where we are somehow jeopardizing the deal if the parties agree to certain terms. Our sole role is to protect the client, whether that’s the buyer or the seller, and get to reasonable terms. That way, it’s successful for both parties. But it’s all about limiting risk and ensuring that if something comes up post-closing that the client was not aware of, that we have the appropriate protections and the documentation to have some recourse, right? That’s always a worst-case scenario where you buy something, and a liability pops up that’s material that you didn’t know about that you weren’t told about. What’s your recourse? What do I have as a remedy? Either is there a hold back or an escrow or do I go after the seller directly? So, navigating the protections for the client is the number one goal. 

Scotty Sykes, CPA, CFP®: You mentioned letter of intent, due diligence, purchase agreement. Touch on that letter of intent, Alfonso. I get a lot of clients asking about that. You know, what is it? Do I need to have it? You know, kind of dive into that if you don’t mind. 

Alfonso Zambrano: Yeah, yeah. So, letter of intent is just a fancy word for a term sheet off the letter. It’s a non-binding indication that a buyer wants to buy the business of the seller. And so, there’s no wrong way to do it. You have different camps that will argue and say the letter of intent should be short, should be one page, and that’s it. It should have the purchase price and two or three things, and that’s it. You have another camp that says no. It needs to be more detailed and negotiated more because then you can draft your documents based on those predetermined ideas or goals. There’s no wrong way. I’m kind of in the middle. I like a letter of intent that’s kind of in the middle of both of those camps where you have enough information to provide you guidance on drafting and on diligence, but it’s not 20 pages long. It’s not a full agreement. So, think about if you’re buying a house, it’s the offer that you’d submit to buying a house. You want to make sure you have your purchase price and you want to make sure you have your conditions to closing. I need to get financing. I want to do my inspections. I want to do my appraisals. And if everything’s okay, then we’ll sign a definitive agreement at a later date. But it’s just a simple document that shows your interest. It’s negotiable both ways. So, it goes back and forth a few times. But the most important part about it, it’s non-binding except for confidentiality and exclusivity. Meaning, whatever I put in that letter, if I offer you $3 million, but after my inspection and appraisal it’s only worth $2 million, I’m not bound to pay you $3 million. That’s not a binding term. What is binding is confidentiality, meaning whatever information we share, financials, tax returns, employee records, all of that stays confidential and will for the duration of this transaction. 

Scotty Sykes, CPA, CFP®: What about red flags? What are some red flags? Not only in the letter of intent perhaps, but maybe just in the negotiation, the due diligence? 

Bonnie Bond, CPA: The skeletons in the closet. 

Alfonso Zambrano: Yeah, yeah. So, a lot of the red flags could be basic corporate formalities. Like does the company, does the seller, the target company, do they have a list of the owners? Right. Do they have governing documents? That’s one part. Then there’s the documentation. Do they have payor contracts, copies of payor contracts? Do they have appropriate documentation showing that they are employing everybody properly? Have they filed their taxes correctly? Are there outstanding repayments or audits? So probably out of the full spectrum of red flags, I would say that having appropriate contracts in place and licensure in place is number one, right? Because you don’t want to buy a pharmacy that doesn’t have good contracts or licensure that’s in good standing. And then the other would be probably taxes and employees are, they’re probably the three biggest items that we see as kind of red flags. On taxes, you have a lot of mom and pops who have gone to a CPA, not like Sykes & Company. It’s, the mom and pop down the street that just does tax returns. They got their EIN and they were told to do an S corp status, but they haven’t run it like an S corp, right? Or they were told to do a C corp status. So, some bad advice up front and they run with that over time and now there may be some issues on the tax returns or tax filings. And then employees is always a hot subject because you never quite know what you’re assuming as a buyer. You can do your due diligence but on employees, are they classified correctly? Are there appropriate employee policies and procedures? Have there been issues in the past with employees? You know, the best I was told, you know, it’s always fun running a business until you have to deal with people. The people part is always the hardest, right? And so, you just never know what you’re going to inherit. So, it’s always imperative to do some diligence on the employees. And that’s always difficult for both the buyer and the seller because sellers like to keep the transactions close to the vest. Initially, they don’t want anybody to know that they’re selling, right? And if you’re on the buy side, you want to start having some interviews with these people and try to get a feel like they are going to be with us post-closing? So that’s probably one of the harder things to navigate. Actually, is the timing of when can the seller introduce the buyer to the employees? And do we have a signed agreement yet? Are we closer to closing that timing of that? Again, there’s no wrong answer. It’s subjective to the parties that are negotiating the deal. 

Bonnie Bond, CPA: Yeah, and a great point to make for anybody listening is, you mentioned accounting and having the guy down the street do it. Same thing with attorneys. It’s, you know, we don’t have any conflict of interest. Obviously, we love working with Brown and Fortunato primarily because you guys work with pharmacies and how important that is.  

Scotty Sykes, CPA, CFP®: And you’re doing it right. 

Bonnie Bond, CPA: And you do it right. But working with a healthcare specialist attorney that understands pharmacy is so important when you’re looking at these transitions. We have seen deals that come to us after the fact that, you know, the attorney down the street just did. Again, it could be a great attorney, but when you don’t have experience, I think protection is a big thing. Like when you said that’s what made me think of that. Because there’s so many of these skeletons in the closet, it doesn’t have to kill the deal, it could just, it needs to be addressed and protected in the documents. And many different ways to do that when you understand how to do it. 

Alfonso Zambrano: Well, I think that doesn’t apply just to attorneys. I think any advisor should be a specialist in the industry that you’re working in, right? Just like you guys. You are experts in the pharmacy field, and there’s brokers who are experts in the pharmacy field, and consultants, and everybody else. So, I always use the analogy of a physician, right? You don’t want to go to a brain surgeon if you have a stomachache, right? You don’t want to go to podiatrist if you have a spine issue. Same thing with professionals. You want to go to somebody who’s specialized in that field because of their experience and because they know that industry. And I think that’s one thing that’s probably not focused on a lot. I think it’s difficult because people have friends. Hey, I’ve got a guy who’s an attorney friend. He can help me with that. Right. Or I’ve got a friend who’s an accountant. They can review the financials. It’s not going to be a big deal. But once you kind of get in the weeds, you’re leaving yourself open to some liability because if that practitioner doesn’t have that experience, that industry, they may, and it’s not going to be their fault intentionally. They just have no idea what to look for example: I don’t practice family law. 

Bonnie Bond, CPA: Exactly. I mean just inventory, receivables even just in those two areas if things aren’t adjusted and accounted for properly can throw the numbers completely off. Your whole deal is not what you think it is. So, it’s just very important. 

Scotty Sykes, CPA, CFP®: And pharmacy is definitely unique enough where a specialization carries a lot of value for sure. 

Alfonso Zambrano: Exactly. Yeah, agree 100%. 

Scotty Sykes, CPA, CFP®: But interviewing those employees is definitely important. You know, getting that team, that transition. I mean, that is definitely the hardest part. I mean, I gotta work with Bonnie every day and you just have, you guys have no idea. 

Bonnie Bond, CPA: You’re so lucky. But no, we see that a lot. I can, almost everyone I think that I have worked with a transition with I think just assumes that they have to kind of go in with the staff that’s there and it’s like, whoa, whoa, whoa, you don’t have to do that. Please don’t do that. Like, you know, you really should treat it truly like an interview. Like you mentioned, like go through these people and find out. It’s so important. Maybe everybody’s great, but payroll is a big item on a lot of sales that we see that’s out of whack, and that usually that’s a good time to handle that right up front. Let’s get that under control. 

Alfonso Zambrano: Yeah, and I’ve seen on the employee front, I’ve seen again, kind of extremes on the spectrum. I’ve seen where the value of the pharmacy business is the employees. And after the buyer has done their diligence and they’ve identified that the employees are the reason why they’re so profitable, they’ll they will set aside some of the funds to pay retention bonuses to make sure those employees stay. And then the exact opposite is like, you’re a detriment. Like when I’m coming in, you’re out buddy. So, I’ve seen both sides where you have the most valuable to the least valuable. You’re just ready to cut ties and make sure they’re out of there before I even close. 

Scotty Sykes, CPA, CFP®: I’d be remiss if I didn’t drop a Jeff-ism here, but a new sheriff in town? Is that a Jeff-ism? New sheriff in town. 

Alfonso Zambrano: Yeah. yeah. Yeah. 

Bonnie Bond, CPA: What is it? What’s the one about the hat? Is the Texas one about the hat? 

Scotty Sykes, CPA, CFP®: There’s always if it walks like a duck, talks like a duck, it’s a duck. I don’t know. He’s got that. 

Bonnie Bond, CPA: No, but there’s a Texas all cowboy. 

Alfonso Zambrano: All hat, no cattle. All hat, no cattle.  

Bonnie Bond, CPA: Yes. 

Scotty Sykes, CPA, CFP®: We could probably do a whole episode on Jeffisms, but 

Alfonso Zambrano: When I was traveling with him on the circuit, man, it’s funny because different audience every time, but the same spiel. I’ve memorized a lot of those, get this. 

Scotty Sykes, CPA, CFP®: That’s funny. Yeah. 

Bonnie Bond, CPA: You know what? Hopefully we can go back and have our marketing guy Austin insert this into the podcast when it’s actually live. But did you hear about, don’t know if you were with him, Scotty, were you there when Ollin visited Jeff’s office and took a bunch of pictures in there? Did you ever see those, Alfonso? 

Alfonso Zambrano: Yeah. No, I remember you guys coming to Amarillo because we had lunch out here when y’all were in. 

Bonnie Bond, CPA: Jeff wasn’t there, but Ollin, it’s the best thing I think of a funniest thing I’ve ever seen Ollin do is he took pictures of himself in Jeff’s office like laying on the couch. He was at his desk and he sent it to him. It was great. We gotta, we might need to insert that here on the podcast. That was a good time. 

Scotty Sykes, CPA, CFP®: We’ll save that for our year-end blooper episode. 

Bonnie Bond, CPA: Sure. I forgot about that. Golly.  

Scotty Sykes, CPA, CFP®: That’s coming up isn’t it? 

Bonnie Bond, CPA: It is, it is, it is. 

Scotty Sykes, CPA, CFP®: Well, Alfonso, some good content here and, you could really just go on all day about this stuff, but… 

Bonnie Bond, CPA: Yes, always good info. We should have you on for like a what not to do bad like example bad stories. That would be a good one. 

Alfonso Zambrano: Yeah, I’m happy to say we’ve always, there’s always stories to tell, tell you that. There’s always stories to tell, always good things and bad things to talk about when we talk about doing these experiences with clients. And part of it, working with people and hearing, man, some of these stories and some of these things that you deal with, and you guys too, it’s just, it’s unbelievable. I love it, I love what I do. I love people. You learn, but then… 

Bonnie Bond, CPA: Working with people. I like, yeah. Well, you learn something from everyone that you can take to the next. It’s like, okay, that was not the way to handle that. We’ll make sure we don’t do it that way the next time. Yeah. 

Alfonso Zambrano: That’s right. But it’s so fun dealing with different personalities. Man, it’s good, not in a bad way, they’re just, everybody does it differently. And getting to deal with people all over the country and how they’re approaching their craft or their transaction, it’s amazing. But again, there’s a lot of funny stories involved in that process for sure. 

Scotty Sykes, CPA, CFP®: Well, I will plug our Pharmacy Ownership Podcast that we have. Me and Ollin, dad do. think it’s once a month on buy, sell, startups pharmacies. And, so check that out, those listening in. But Alfonso, I appreciate y’all getting on. Appreciate what y’all do in the industry for our clients and y’all keep up the great work.