The Importance of Due Diligence When Buying a Pharmacy
Due diligence is an important process when buying a pharmacy. In this video, Ollin Sykes, CPA and Bonnie Bond, CPA discuss the importance of the due diligence process and what can be discovered when completing this process accurately. Make sure your due diligence process includes working with a CPA firm to ensure you are recording all of your pharmacy data accurately.
Sykes & Company, P.A. consults on financing options for pharmacy start-ups and existing pharmacy purchases. Learn more about purchasing a pharmacy by viewing our video series.
If you prefer to read this content, the video transcript is below.
Ollin: Due diligence is the simple act of acquiring information about a pharmacy that you perhaps might be purchasing. When I say “pharmacy,” that could be an asset purchase, that could be a common stock purchase, but it’s the act of getting and acquiring information from the seller and the seller’s representatives so that you, as the buyer, and your representatives can take a deep dive down into the books and records of the pharmacy process that you’re looking at purchasing. It’s extraordinarily important in that process that you acquire a whole list of items, including; the actual accounting books and records, dispensing records, W-2 information, depreciation schedules, just to name a few in order to be able to do this properly.
Typically, if you’re involved in a transaction you might get tax returns and financial statements and think that’s due diligence. That’s not due diligence. That’s something that a seller or a seller’s representatives are using to entice you to buy a pharmacy. Without you actually utilizing the services of a CPA firm that can dig down deep into the accounting books and records, the tax files and all the pharmacy data that we typically can look at, and that we do after 40-some odd years of experience of doing this. We then can analyze and let you know what it looks like it is that you’re buying or not buying and what questions we have about the asset structure, or the liabilities, or whatever the case may be of the entity that you are looking at purchasing.
Bonnie: I think we see very often, Ollin, we get these books and records, we get the tax return and we get maybe some financial statements. You would think they would all tie in and match but obviously in a large amount of situations, they don’t. So obviously there’s an issue and you have to figure out what the right numbers are. Someone can hand you a financial statement that does match the tax return, but is the inventory actually correct? Has it been for those years? Is the receivables tied in? And how many times do we get a tax return maybe where the receivables aren’t booked, and they should have been? So, lots of issues when you actually dig down into the information. And I would add, most importantly, when you mentioned the books and records, we are talking about the accounting file, the QuickBooks file. Not just the tax return and the financials. We need to dig down, have a up-to-date copy, dig down into that QuickBooks file into the transactions to see what’s actually been going on in the pharmacy.
Ollin: So, the moral to the story is this. If you’re looking at potentially spending substantial funds to buy either the assets or the common stock of the entity and you don’t think you need to spend the money to do that deep down due diligence to find out exactly what it is that you’re buying, then you might want to look in the mirror now so that after you get through this process and realize you’ve made a mistake you can look at that mirror again and say, “Yeah, I probably should have taken the time, taken the effort, retained the people that understand how to do these kinds of things both from a legal and from an accounting and tax perspective.” Make that investment into your future in what probably is the largest single investment that you’ve ever made.
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