Buying a pharmacy is one of the biggest investment decisions you are likely to make.
It is a significant investment, involves significant debt, and accordingly deserves significant levels of analysis and advice to ensure you are being as careful as possible. Any business undertaking of this size involves a degree of risk, and any process that helps you reduce that risk, and gives you a greater knowledge about the financial aspects of the pharmacy that should be considered. For those pharmacists who are thinking of buying a pharmacy, understanding the due diligence process is vital.
So, What is Due Diligence?
Essentially it is an investigation to confirm the material financial facts about the business you are about to buy. It comes about when a buyer and seller have agreed in principal to a deal but before a formal binding sale contract has been signed, or often it forms part of the signed sale agreement itself as a condition of sale. The wording of the due diligence clause often varies but generally the buyer is given a period in which to satisfy this condition. 28 days from when the owner supplies all information is usually sufficient, depending on the complexities of the business.
The Due Diligence process should involve your lawyer, but your accountant is the key person you need, especially an accountant with good experience in community pharmacy. You and the accountant agree on what areas of the business you want investigated. Sometimes owners only want us to investigate sales, others just want Sales, Cost of Goods Sold and Gross Profit. Most however just want a general overall investigation into the financial statements of the business. We have highlighted for you some of the areas that should typically be covered for a pharmacy;
1. Bank balances.
2. Customer debtors and PBS amounts outstanding.
3. Stock on Hand.
4. Reconcile financial statements, income tax returns and business activity statements.
5. Trade Creditors.
7. Agreeing key data such as sales, gross profit and stock on hand values to Point of Sale data.
8. Cash banking.
9. Analysing the main expense categories over the past 2 to 3 years, such as wages, superannuation, insurance, rent and outgoings.
10. Lease agreements.
11. Nursing home contracts.
12. Business trends over the past 2 to 3 years.
13. KPI’s and Industry benchmark comparisons over the past 2 to 3 years.
14. Wages, staff rosters, employment agreements and leave entitlements.
There are certainly many areas that need to be investigated and the above items are by no means exhaustive. But it gives you an idea of the key areas will need to be investigated. Importantly your focus must be on assessing the risk of the profits of the business being overstated.
Having undertaken many due diligence investigations in the past, there are problems that occur that you need to be concerned about. The most significant key issues you need to be wary of are as follows;
1. Owners who do not provide information when requested.
2. Owners with unorganised, messy financial reports and systems.
3. Owners who are pressuring you to finalise proceedings.
4. Owners who try to convince you of undisclosed “cash” sales.
5. Significant variations between key data in the financial statements and supporting documents.
6. Key data in the financial statements that is unable to be verified.
7. Significant and unusual fluctuations and variations in the financial data that cannot be explained.
Once your accountant has undertaken his investigation you should then meet with them to go through the findings of the investigation and what implications those findings will have on the business, its risk profile and the earnings. You should also then consider whether any adverse findings will impact your decision to go ahead with the purchase or whether the purchase price should be renegotiated.
These due diligence clauses are important in the process of buying a pharmacy. It enables you to have a thorough investigation into the business to confirm some of the key elements of the financial statements and the importantly the earnings of the business. It also gives you a better understanding of some of the risk areas of the business that you previously may not have been aware of. When you combine these issues, with other issues that your lawyer will cover for you (lease agreements, partnership agreements, terms and conditions of the sale agreement etc) you are in a good position to understand the business you are buying, or not buying.
This is an important decision. You are taking on a big risk and borrowing a lot of money with your own personal assets at risk. So be careful. If you are interested in buying a pharmacy, make sure you give me a call and let us undertake a due diligence investigation for you and give you that peace of mind.