The Pharmacy Ownership Podcast: Inventory and Your Valuation

Inventory can make or break the value of a pharmacy – especially during a sale.  

But how do you ensure you’re handling it the right way? 

In this episode of The Pharmacy Ownership Podcast, Ollin Sykes, CPA, CMA, CITP, and Austin Murray break down the complexities of pharmacy inventory valuation and how it impacts transactions from both the buyer and seller perspectives. 

Tune in to learn more about: 

• Why seasonal and expired items could hurt your bottom line 

• How pre-sale inventory management can boost cash flow 

• The differences between script and OTC inventory 

• Why accurate dating and pricing matter 

ASK A QUESTION

More Resources on this Topic:

Service – Rx Assessment

Buying a Pharmacy? Schedule an Appointment with our transition specialist

Podcast – What to Look for When Buying a Pharmacy

Podcast – Improving Cash Flow with Inventory Management

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

Austin Murray: Alright, good morning, Ollin. Hope you’re doing well.  

Ollin B Sykes, CPA, CMA, CITP: Good morning, Austin. 

Austin Murray: Today’s topic, we’re gonna talk about inventory and what that means in a pharmacy valuation. So I’m looking at buying a pharmacy. What am I looking at in terms of inventory and what all does it mean in terms of what the value of that pharmacy is? 

Ollin B Sykes, CPA, CMA, CITP: Well, inventory is always an issue with respect to both the seller and a buyer in any situation like this, because you’ve got multiple classes of inventory, typically in the pharmacy. Obviously, you have the script inventory. You have OTC inventory. You may have inventory in the back room, which is probably gifts, maybe some cards, maybe some seasonal type of items that have not moved in the past. And that if I’m a seller, I want to try to get as much money out of that as I can upon a sale. Putting it very succinctly and very much to the point, anytime there’s a buy-sell transaction involved, and inventory is taken typically the night before the close, where the buyer and the seller and or their representatives are fully engaged and agree on the counts of everything that is taking place there. Sometimes the third party will come in somebody like say InventoryIQ.net who are inventory pharmacy specialists across the country. Sometimes folks like that will be involved but more often it’s the buyer and the seller doing the actual count themselves. Now, with respect to the script inventory, it’s very important if I’m a buyer that I understand what the dating is for all items on the shelf. Because if something is near dated, meaning that it goes out in the next two weeks, I probably don’t want to have to pay for that. And on the reverse side of that, if I’m a buyer, excuse me, if I’m a seller, in the script area, I probably days and weeks ahead want to go through my script inventory and send back anything that’s not moving to get credits. Sometimes those credits from wholesalers will take weeks to be able to appear on a wholesaler bill. But that’s certainly a way that you can generate cash from a selling standpoint, pre-sale, and refine your inventory down where there’s no potential dating issues on the night before the close. So that would be the main thing there as far as the script inventory is concerned is what those dating are. I know that in many cases, some of the big boxes, for example, will only purchase anything that has dating of 90 days or longer. I don’t typically hear of certain restraints on that type of thing with independents in transactions, but it’s very important to understand what it is that you’re buying. Of course, you know, with script inventory, you’ve got things maybe to be kept in the refrigerator. You’ve got things on the shelf. But it’s very important that everybody come to the conclusion as far as the value. There we go again, talking about value of that actual script inventory because values can be determined in a multiplicity of ways. And sometimes the script management systems, if there is a perpetual system in place with the script management system, the pricing may need to be checked and rechecked, again, by both the buyer and the seller, both pre-sale and at the time of the inventory taken that night. Because you may, if I’m a seller, I may be buying from multiple resources, multiple sources. I might have a primary and several secondary wholesalers I buy from and my pricing may not be correct in the system, but you’ve got to coordinate all this, to make sure it’s correct. And if we can switch a minute out to the OTC area, some pharmacies have huge OTC areas, some pharmacies have minimal areas. I once knew a pharmacy that had 600 square feet that only had two point of sale registers and a row of Aspirin and Tylenol right underneath the point of sale counter and no other OTC items other than that. So it can go from one area to an extreme, but more importantly there is the value. And I cannot tell you the number of situations we run into that there’s inventory out there that’s turning less than once a year, which I probably don’t want to buy. And there has to be a lot of negotiation between the buyer and the seller about those values and about whether there is any value associated with it. But if I’m a buyer, I just don’t want to accept exactly what the seller is offering to sell that price-wise. There needs to be some coordination there and some negotiation with this pricing. And then like I said, once you get in that back room with those seasonal items in storage, the Easter items, the Christmas items, the Mother’s Day items. Maybe they didn’t move from prior years. You’re talking about negotiation. There’s a lot of negotiations going to take place there. And there’s some folks in the industry who will say if you place it out in front of the store at night in the morning, comes, you come back to the store, it’s still there. You know it has no value. So that’s certainly one way to look at it. But it’s, obviously that’s said in jest, but you know, that’s pretty much the key points that we need to consider with respect to OTC and script inventory. But it’s a very, it’s a very integral component part of a transaction between a buyer and a seller.