Most experienced pharmacy buyers will be familiar with this topic. However, I have found that inexperienced buyers are often unsure about due diligence and how it typically plays out in a pharmacy transaction. Below is a basic overview that may be helpful to those starting out in pharmacy ownership.
What is due diligence?
‘Due diligence’, often shortened to ‘DD’, refers to a structured review period in which the purchaser can examine and verify the financial and operational information that was presented by the broker/vendor for a listed business.
In the pharmacy sales context, due diligence is generally conducted after the Offer to Purchase is executed (i.e. signed by all parties) and serves as a condition that must be satisfied before the transaction can progress to settlement.
At AP Group, we have an online offer system that allows the prospective buyer to include a due diligence condition in their offer at their discretion. If their offer ends up being accepted by the vendor, the DD condition basically functions as follows:
- The purchaser has 7 days from offer execution to provide their ‘Due Diligence Request List’. This list outlines the information they require to conduct their due diligence investigation.
- Following receipt of the Request List, the vendor has 10 days to supply the requested information and/or comment on any items that are not applicable or not available.
- Once all the available information is supplied to the purchaser, the due diligence review period will run for between 7–21 days as specified in the offer document.
Why conduct a due diligence investigation?
Due diligence provides the buyer with comfort and confidence that the pharmacy they are paying for is performing as advertised and ensures that any discrepancies are identified before the transaction is finalised.
Most pharmacies in Australia are valued using the FME/cap rate method, meaning that profitability is the key metric. If the FME is overstated – whether due to inflated income or understated expenses – the pharmacy’s value will be falsely high.
At AP Group, we provide a comprehensive data package with our listings. This usually includes a valuation from an external, accredited pharmacy valuer. It is only on rare occasions that a material issue is discovered in due diligence. When something is discovered, it is usually because there has been a change in performance of the business from when the listing data was captured to when the DD is conducted.
If something is uncovered that materially impacts the value of the business or is otherwise contrary to how the business was advertised, then the purchaser will have grounds to withdraw from the transaction or renegotiate the sale price.
However, it is important to note that due diligence is not a ‘change of mind’ opportunity for the purchaser. If no material issues are discovered in the DD review, then the purchaser will generally not have legitimate grounds to withdraw from the transaction or renegotiate the sale price.
In some cases, such as PBS Approval Number sales, a due diligence investigation may not be necessary. However, for most pharmacy acquisitions, it is recommended that prospective buyers include a DD condition in their offer.
Who conducts due diligence?
The buyer has the option to conduct the due diligence investigation themselves, or they can engage a specialist. In most cases, the buyer will elect to appoint a pharmacy specialist accountant to conduct the DD on their behalf.
This is generally the most sensible approach, especially for high-value pharmacies and in scenarios where the buyer is inexperienced. Community pharmacy is a nuanced industry and sometimes a significant amount of data will be required to assess the business thoroughly.
An expert pharmacy accountant will know what data to request and will be able to identify any potential red flags.
What are the key focus areas in pharmacy DDs?
Information that confirms the income and expenses of the business being sold will be central to the DD review. It is also an opportunity to examine the physical details of the pharmacy, confirm the lease and staffing requirements, and assess any potential changes to the catchment area.
Items that are commonly included in a Due Diligence Request List:
- Business Activity Statements (BAS)
- Trading Bank Account Statements
- PBS Payment Advice
- Supplier Statements
- Trade Debtor/Creditor Reports
- Trial Balance / Reconciliation Reports
- Stock Reports
- Script Reports
- POS Reports
- Staffing/wages records
- Lease Documents
Key Takeaways on Due Diligence
Due diligence is a critical step in the pharmacy acquisition process, helping buyers ensure they are making a sound investment. By thoroughly reviewing financials, operational details, and market conditions, buyers can identify potential risks and make informed decisions. While most pharmacy transactions proceed without issue, due diligence acts as an essential safeguard, providing buyers with the confidence to move forward or reconsider if necessary. Engaging experienced professionals, such as specialist pharmacy accountants, can make the process more efficient and effective, ensuring the business aligns with their expectations and financial goals. We often work with specialist pharmacy accountants, so feel free to reach out if you’d like us to refer you to one.
Written by Will Brown, VIC & TAS State Manager – AP Group
AP Group are the leading pharmacy experts in Australia, helping hundreds of pharmacists into ownership every year – our team can help with sourcing finance for your purchase, as well as providing the right legal advice to help you navigate the process.
We connect existing pharmacy owners with over 5000 ready and eager investors via our cutting-edge online Data Room. Our Data Room keeps confidential listing data secure and allows buyers to make informed decisions on each of our pharmacies for sale.
About the Author:
Will Brown always seems to bring a good mood to the AP Group office. So, perhaps it’s no surprise he’s so positive and pro-active at helping clients with buying, selling, and negotiating pharmacy transactions. In more recent years, he’s added lease negotiations to his offerings, complementing his genuine love for helping pharmacists achieve their goals.
Will understands that pharmacy sales is all about people. Luckily for him, he’s been described as approachable, transparent, reliable and responsive. In his early career, he worked as an English Teacher and Journalist, giving him exceptional communication skills and the ability to present data in its most clear and meaningful form. An asset to negotiations and the AP Group team!