10 red flags to watch for before you buy a pharmacy

Most bad pharmacy purchases don't fail because the buyer can't run a pharmacy. They fail because of something that was visible before closing, if you knew where to look. These are the ten we check on every deal we review.

1. The lease has less than five years left

Your bank will usually want the lease term, including renewals, to at least match the loan. A short lease with no renewal option hands the landlord all the leverage the day you buy. Read it yourself. Look for the term, renewal options, whether it can be assigned to you, and whether the landlord's consent is needed.

2. There's a radius clause you didn't notice

Many leases stop the tenant from operating another pharmacy within a set distance. If you own or plan to open a second store nearby, that clause can put you in breach on day one.

3. One doctor writes most of the prescriptions

A busy clinic next door is a great asset until that doctor retires, moves or opens their own pharmacy. Ask for a prescriber report showing the share of scripts by prescriber. If the seller won't share it, treat that as an answer. If there's an in-store clinic, read the physician agreement: term, renewal and how either side can end it.

4. The rebate number is a guess

Generic rebates can be a large share of a pharmacy's profit, and they're the easiest number to inflate. Ask for the actual rebate statements from the banner or wholesaler. Remember that if you're switching banners after closing, the seller's rebate terms may not carry over to you.

5. Prescriptions are falling and no one can explain why

Look at monthly prescription counts for at least 24 months. A slow decline can mean a competitor opened, a doctor left or service is slipping. A sudden jump just before the sale deserves just as many questions.

6. The owner is the business

If patients come for the owner by name, or the owner works 60 hours a week that never show up on payroll, the profit you're buying may walk out the door with them. Price in a replacement pharmacist at market rates, and ask the seller to stay on for a transition period.

7. There's an audit history

Ask directly about ODB inspections and private insurer audits in the last few years, and whether any money was recovered. In a share purchase, you inherit the corporation's history, including future recoveries for past claims. In any purchase, an audit pattern tells you something about how the pharmacy was run.

8. The inventory doesn't match the books

Inventory is usually paid for at cost at closing. Make sure the count excludes expired, damaged and unsaleable stock, and that both sides agree on the method before the count day. Overstated inventory is money straight out of your pocket.

9. The banner agreement ends soon, or won't let you leave

Read the banner or franchise agreement. Some are about to expire, which can change the economics overnight. Others have termination fees, purchase rights or non-competes that affect what you can do after you buy.

10. The seller is in a hurry to skip diligence

Good stores can withstand a proper look. Be wary of pressure to sign quickly, refusals to provide bank statements to match the financials, or "you'll see everything after the deposit." Reports from the dispensing software, bank statements and tax returns should tell the same story.

Red flags don't always mean walk away

Plenty of good deals have a flag or two. A short lease can be renegotiated before closing. Prescriber risk can be priced in. An unverified rebate can be handled with a price adjustment tied to the real number. The goal isn't to find a perfect pharmacy. It's to know exactly what you're buying and pay the right price for it.

That's what our buyer opportunity memos are built to show. Every one lists the risks and open questions alongside the numbers, so you can make the decision with your eyes open.