Why I Don’t Read the Accounts When I Buy a Pharmacy (and What I Verify Instead)
Here’s a confession that’ll annoy a few accountants: when I’m buying a pharmacy, I don’t really read the accounts. Let me be precise about that claim, because it’s specific — it’s not “accounts are useless,” it’s “don’t trust a number you can’t verify.” Here’s how I actually do due diligence.
The short version
- Never buy on the bottom line — prepared accounts can be window-dressed.
- Ask who verified them. The seller provides the information; the accountant compiles it.
- Verify what a third party proves: NHS payment schedules, VAT/tax returns, PAYE, lease, rent, rates, utilities.
- Accrual ≠ cash: recorded profit isn’t money in the bank.
- The balance sheet matters most for a share sale, far less for an asset sale.
This is the written companion to my video on the same point. If you’d rather hear it straight from me, watch it here, then read on for the detail.
The claim, stated precisely
I’m not saying accounts are worthless, and I’m certainly not accusing pharmacists of fiddling their books. My point is narrower and more useful: ask who audited or verified the accounts you’re being shown. In most small-business sales, nobody independently did. The seller provides the information, the accountant prepares the statements from it — and there are countless examples across business (not pharmacy specifically) where accounts have been “window-dressed” to look healthier than the reality underneath. You didn’t write those numbers. So why would you stake hundreds of thousands of pounds on them at face value?
Why the “profit” on the page can mislead you
Here’s the mechanism people miss. Most accounts are prepared on an accrual basis, not a cash basis. Under accrual accounting, you record revenue when it’s invoiced, not when the cash actually lands. So I could raise invoices today, put them on the books, and record them as profit — even if I never receive the money. The profit-and-loss account shows a healthy profit; the bank account tells a very different story.
It goes further. You can adjust the debtor book and make the profits look higher. Legal, illegal — that’s not the point here. The point is simply that these figures can be shaped. A profit you can’t trace to cash is a story, not a fact.
The NHS, HMRC, your landlord and the utility company have no reason to flatter the seller’s numbers. That’s exactly why I anchor on them.
The numbers I actually verify
When I look at a pharmacy, I’m really after a handful of figures I can confirm independently:
- NHS payment schedules — the PPD / NHSBSA schedule of payments. This is the dispensing income, verified by the NHS. It’s the backbone of the business and it’s very hard to fake.
- VAT and tax returns — submitted to HMRC, so they corroborate the trading picture.
- PAYE statements — these tell me the staffing: how many people, and what they’re paid. Staffing cost is one of the biggest levers in a pharmacy and this is straightforward to work out.
- Over-the-counter sales — I’ll look, but honestly I tend to assume a baseline of what’s achievable in that shop. As long as the NHS income covers the cost base with a little to spare, I know I can build the OTC trade myself.
Alongside those, I get the lease (so I know the actual rent), the business rates, and the utility bills. Every one of those comes from someone other than the seller — which is the whole point.
So when do the “proper” statements matter?
I’m not telling you to ignore the balance sheet, the cash flow statement and the P&L — I’m telling you to understand when each one matters.
The balance sheet becomes important in a share sale, because you’re buying the company itself — so you need to know its current assets, current liabilities and long-term liabilities. In an asset sale, where you’re buying the business’s assets rather than the company, it’s far less relevant. Watch the reserves, too: accumulated reserves may already have been spent, so they don’t tell you much — look at what’s actually in the bank. And the P&L? As above — useful, but dressable. Never the thing you buy on.
| What you’re shown | Trust it? | Why |
|---|---|---|
| NHS payment schedule | Yes — verify | Comes from the NHS; proves dispensing income. |
| VAT / tax returns | Yes — verify | Submitted to HMRC; corroborates trading. |
| PAYE statements | Yes — verify | Reveals true staffing cost. |
| Lease, rates, utilities | Yes — verify | Third-party documents; the real fixed costs. |
| Profit & loss | With caution | Accrual-based and dressable; profit ≠ cash. |
| Balance sheet | Depends | Crucial for a share sale; minor for an asset sale. |
The rule, in one line
Do not buy a pharmacy on the bottom line. Verify the income, verify the fixed costs, and treat everything else as a claim until it’s proven. If a number can’t be traced back to the NHS, HMRC, a landlord or a bank statement, it’s not yet a fact — it’s a starting point for questions. (This is the same discipline I cover from a different angle in the 5 mistakes that cost pharmacy owners and opening vs buying a pharmacy.)
How I can help
I’ve made in-depth videos on how to actually read a profit-and-loss account, a balance sheet and VAT returns — the mechanics — but the mindset above matters more than any single statement. If you’re weighing up a purchase and want a straight, experienced second opinion on the numbers and the deal — or you want to develop your clinical skills, get access to a DPP, or open a private clinic — get in touch.
Frequently asked questions
Should you trust a pharmacy’s accounts when buying?
Not at face value. The accounts are prepared from information the seller provides and are not necessarily audited or independently verified, so the headline figures can be window-dressed. That doesn’t mean every seller does this, but never buy on the bottom line alone — treat the accounts as a starting point and verify the numbers that genuinely can be verified.
What pharmacy numbers can you actually verify?
The NHS payment schedules (the PPD/NHSBSA schedule of payments) which prove the dispensing income, VAT and tax returns, PAYE statements which reveal staffing costs, and the lease, rent, business rates and utility bills. These come from third parties — the NHS, HMRC, the landlord, the utility company — so they’re very hard to fake, unlike a prepared profit and loss account.
What is accrual versus cash accounting, and why does it matter?
Under accrual accounting you record revenue when it’s invoiced, not when the cash arrives — so a business can raise invoices and book them as profit even though the money was never received. The profit shown in the accounts is not necessarily cash in the bank, which is why you verify the cash and the third-party records rather than trusting recorded profit.
Does the balance sheet matter when buying a pharmacy?
It depends on the deal. The balance sheet matters most in a share sale, where you buy the company itself and inherit its current assets, current liabilities and long-term liabilities. In an asset sale it’s much less relevant. Be careful with reserves too — accumulated reserves may already have been spent, so look at what’s actually in the bank.
What’s the difference between an asset sale and a share sale?
In an asset sale you buy specific assets of the business and usually leave the company and many of its liabilities behind. In a share sale you buy the company itself, so you take on everything it owns and owes. That’s why the balance sheet, liabilities and what’s genuinely in the bank matter far more in a share sale.
Comments
Bought a pharmacy and learned this the hard way — or want me to break down how to read a P&L or VAT return? Leave a comment below; I read them all.