Buying a Pharmacy – The Basics of Due Diligence

Before purchasing a pharmacy, it is imperative to perform due diligence to be sure you have a complete and transparent package of information. Although it is best to have an experienced eye to help with the process, it is important to understand the basics of due diligence.

There are four fundamental questions that must be answered during due diligence:

• Is the financial information that is provided complete and accurate?
  
• Is the Rx volume stable and reliable?
  
• Is there any past or present board disputes, audits, or litigation?
  
• Are there any operational issues which could adversely affect the transition?
  

At the core of the financial information is the tax return. You will want to see returns for the last three years. Along with the tax returns, the seller should provide financial statements and prescription summary reports for the same time periods. The first objective is to make sure all three sets of information tell the same story. Do the financials have the same sales, gross profits, and expenses as the tax returns? Do the prescription summary reports approximate the sales volume listed on the returns? You will also want to request at least three months of bank statements to verify that the amount of deposits and withdrawals would justify the projected financials. Next you will need to identify any trending of sales, gross margin, expenses, and net profit. Review the balance sheets from each year to identify changes in cash, owner draws, and any changes in assets or liabilities. Financial due diligence is the most important step and also the most complex. Professional advice is recommended to make sure this review is thorough.

You will also want to make sure the prescription volume is stable and reliable. You will want to see consistency from year to year in terms of how many prescriptions are being filled and also identify what type of prescriptions they are. What is the ratio of new to refilled prescriptions? What percent of the prescriptions are for controlled drugs? Does the pharmacy compound, have LTC, deliver, or mail prescriptions? Is there any one payer or referral source that is dominant to the mix? Is there a particular high dollar drug that may distort the sales numbers?

Next you must make sure there is complete disclosure of any past or present board disputes, audits, or litigation. This is particularly important in a stock sale. Even situations that have been resolved and are in the past can affect how this location is viewed by state inspectors, auditors, or wholesalers.

Perhaps the biggest operational challenge is transitioning the staff. During due diligence you will want to identify rates of pay and benefits and determine if they are sustainable. What are the current store policies, and will there need to be any major changes? Who are the key personnel and are there any noncompete agreements in place?

You are about to make one of the largest purchases of your lifetime. Understanding the basics of due diligence will not only make you a better buyer, but it will also make you a better operator and ensure that the transition goes smoothly. Be sure to take the necessary time and seek professional advice so you have complete confidence in the transaction.