The Pharmacy Ownership Podcast | Due Diligence: What to Look for When Buying a Pharmacy
The most important step you can take when buying a pharmacy is performing the right due diligence, but what should you be looking for
In this episode of The Pharmacy Ownership Podcast, Scotty Sykes, CPA, CFP®, and Ollin Sykes, CPA, CITP, CMA share critical insights into the due diligence process when purchasing a pharmacy.
Tune in to learn more:
- Why financial statements often don’t match tax returns
- The importance of reviewing third-party receivables, inventory, and leases
- How accurate due diligence can impact pharmacy valuation and negotiations
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More Resources on this Topic:
Podcast: What is Due Diligence
Blog: The Importance of Due Diligence When Buying a Pharmacy
Podcast: How to Buy a Pharmacy
If you prefer to read this content, the video transcript is below:
Scotty Sykes, CPA, CFP®: And hello everyone, another episode of the Pharmacy Ownership Podcast here and today’s question is, what is the number one or the top due diligence item that a pharmacy owner needs to consider when looking to purchase a location, pharmacy entity or location?
Ollin B Sykes, CPA, CITP, CMA: Well, Scotty, I can tell you very simply, the very top item on our list, on our proprietary due diligence checklist we have, is the actual full backed up accounting file and the tax returns for the entity that you’re looking at potentially purchasing. Whether it’s an asset sale, whether it’s a potential stock sale, most times these transactions if you’re looking at purchasing an entity, you’re provided financial statements, on paper, which in some cases don’t tie in with the tax returns. Sometimes, I’ve actually seen the financial statements been doctored up to not be the actual ones versus what was, what is actually in the accounting files. But the accounting files gives us in doing the due diligence, which we do a lot of due diligence when we’re looking at potentially helping clients, especially on the purchase side, to really analyze the last three to five years of history of all transactions on the balance sheet as well as the P&L in typically it’s the QuickBooks file that we were able to then build a financial model to determine essentially an appropriate valuation on an informal basis of that pharmacy in a multiplicity of ways. So, it tells us whether there are issues with third party receivables, which often times there are. Sometimes the receivables are not even recorded. A lot of times inventory changes once a year, not monthly. A lot of times debt is inappropriately shown. Leases sometimes are incorrectly coded, whether it’s an operating lease or a capital lease, sometimes that’s an issue. Many times the fixed assets are, sometimes the asset list is 40, 50 years of items that have zero value when you’re looking at purchasing those items. But without question, getting the accounting file, doing the due diligence with that, building that model, tying that model into the actual tax returns that have been filed is the single most important issue as far as doing that due diligence. If you’re not doing this and if you’re accepting the paper reports that you get maybe from a broker, which often times is the case, keeping in mind that a broker has one thing in mind to get his 8 – 10% commission on the sale of the transaction. He could care less you, he could care not a flip about you as a potential buyer. He just wants you to get the transaction closed. And a lot of times, us asking for not only the accounting file and the tax returns and other due diligence items we have on our proprietary list is sometimes pushed back by the broker and the seller because they see us as an impediment to the transaction when in real world sense, what we’re doing is protecting the potential buyer that you may be looking at this transaction, Scotty.
Scotty Sykes, CPA, CFP®: Yeah, and when we’re talking about due diligence on the accounting side, I mean, the bank’s gonna obviously be doing their accounting, their financial due diligence as well, and you know, so this is an extremely important topic.
Ollin B Sykes, CPA, CITP, CMA: Well, here’s the other thing. Time out just a second. All right. Speaking of the bank, the bank will often take the tax returns themselves because that’s what actually has been filed with the government. And they’re required to take the tax returns in doing their analysis and making their calculations of the cash flow available for debt coverage. Again, a lot of times those tax returns are wrong. It’s amazing how often we will find that the tax returns are totally incorrect. They don’t tie back in with the books and records. And yet the bank has to use the tax returns that were actually filed with the internal revenue service in looking at an SBA application. So sometimes that becomes a problematic issue. It has to be dealt with and addressed, especially when the accounting files and records are not up to date. The adjustments are not appropriate or where the things have been completely left out or amendments perhaps need to be made on those tax returns. So again, these are some of the kinds of issues we run into very commonly that you as a potential buyer need to be very much aware of and you need somebody that has the experience like we have to help you in this process if you’re seriously considering purchasing either a file, certain assets or the entity as a whole.
Scotty Sykes, CPA, CFP®: And it’s step one because you can get in there into these numbers and know right away whether this is something worth purchasing or not. I mean, there’s been many instances where we’ve done a due diligence just off the financial piece, didn’t even get into all the rest of it. It was like, let’s not waste our time anymore. This is not worth even considering. And then on the other hand of that, we get in there, you do your due diligence and you say, all right, here’s some issues and this is gonna affect the valuation. They’re asking two million that there’s no way they’re gonna get to two million and this is why, and then this is a more reasonable perhaps valuation. So that negotiation piece is huge to it as well.
Ollin B Sykes, CPA, CITP, CMA: Yes it is. No question.
Scotty Sykes, CPA, CFP®: All right. All right. Thank you everyone for listening in and we’ll see you on another episode.