Whether you are taking the plunge into business ownership or have owned your own pharmacy business for many years and are now looking to retire, you will have to go through a similar process (albeit from opposite viewpoints) to achieve your aims. Preparation and planning on both sides is the key to a successful transaction.
For a buyer, trying to find the right business will very much depend on their personal circumstances, such as geographical and financial limitations. Buyers should be realistic and honest with themselves. Should you even be considering a business that is at the other end of the country if your family is settled in a particular area?
There are sales agents who specialise in selling pharmacy businesses, and registering with them is always a good idea as many sellers will restrict their agents from advertising in the mainstream journals. Forming a strong relationship with an agent may give you the edge in striking a deal with a seller before another buyer does. As a seller, unless you know someone who is personally looking to buy then registration with an agent is your best chance of finding a buyer.
As a buyer, once you have found a business that you are interested in you should learn as much about it as you can. There will be a due diligence process carried out by your legal and financial advisers but there is plenty that you can do personally. Speak to the local doctors’ surgeries and other pharmacists in the area. Try to find out whether any new applications have been made to join the PCT’s pharmaceutical list, or whether a business has applied to relocate into the area. Check on the location and number of potential competitors to the business.
Valuation and finance
Whether buying or selling you should always obtain your own independent valuation of the business. Remember that a seller will want to maximise value and both parties will want to know that the price is fair. It is always best to approach specialists in this area as you may be surprised at the difference that an expert in pharmacy valuations can make. The buyer will need to verify the seller’s valuation, so the seller should provide enough information for the buyer to get his own valuation done before making an initial ‘subject to contract’ offer.
A buyer should consider finance at a very early stage. There is little point in trawling the market for suitable targets if you have little or no prospect of funding your purchase. A strong and coherent business plan will make the task of finding funding much easier, and your accountant should be able to guide you through this process.
There are a number of ways in which a buyer can obtain the required finance. Traditionally, the main providers have been high street financial institutions and pharmaceutical wholesaler guarantee schemes (although wholesalers, understandably, have moved away from this type of funding arrangement to avoid taking on more potential liability).
Buyers should also bear in mind that they are unlikely to get 100 per cent funding and will usually be required to put in some of their own cash. Funders like to know that there is an element of personal investment and risk.
Buyers need to get the structure of their purchase right. Should you buy in your own name, or should you think about utilising a new company formed for the purpose? Buying and taking out a loan in your own name may mean costly double taxation, ie extracting sums from the company usually by way of dividends to make repayments on the loan. Loans taken out in your own name may not attract full tax relief, meaning potentially tens of thousands of pounds worth of extra taxation payable. Going to a little bit of trouble at the outset may save money in the long term.
Where the business is owned by a limited company most transactions now proceed by way of a sale of the shares in that company (as opposed to a sale of the business and assets of the company), as this is usually more tax efficient for the seller.
The legal process
Heads of agreement
Once a deal has been reached ‘in principle’ then both parties should be looking to set down the principal terms subject to formal contract. This is done in the heads of agreement. The buyer will want to motor ahead with due diligence at this stage (both financial and legal) and in view of the costs involved it is not unusual for a buyer to insist on having an exclusive negotiating period so that he knows that the seller will not be talking to any other interested parties. This can typically be a period of three months, but is usually linked to how long it is envisaged the sale process will then take if it proceeds smoothly.
Once the heads of agreement have been signed the buyer’s solicitors will produce the first draft of the sale contract. The contract will typically set out what has been agreed in the heads of agreement, but will incorporate many other matters including warranties and indemnities. Warranties will, in certain circumstances, allow the buyer to seek financial redress from the seller after completion if all is not as it is warranted to be. Indemnities provide for payments to be made by the seller if certain situations covered by the indemnities arise after completion. The sale agreement will be heavily negotiated between the parties and their legal advisors until agreement is reached and the parties are ready to complete.
Other aspects for the parties to consider include the NHS contract, and particularly whether any applications to the relevant PCT need to be made. If you are buying the business and assets of an existing pharmacy business, as opposed to the shares in a limited company, then an application to the relevant PCT will be required as this constitutes a change in ownership. The sale contract will not automatically transfer the NHS contract to the buyer and there is a process to go through with the relevant PCT. Any required notifications or applications to the General Pharmaceutical Council should also be taken care of.
For business (as opposed to share) sales the parties will also have to consider and comply with the Transfer of Undertakings (Protection of Employment) Regulations 2006 (commonly referred to as TUPE) in relation to the employees of the business. These regulations have the effect of transferring the contracts of employment of the employees from the seller to the buyer by operation of law, but there are certain procedures which need to be complied with under these regulations which, if not complied with, can result in the parties being liable to each other or the employees themselves.
Once the deal has been completed and the buyer and the seller each go their separate ways the seller should ensure that all relevant tax planning (that should have been discussed with his tax advisers prior to the sale) is undertaken. This should include reviewing an existing will or preparing a will if one is not already in place.
Further information Ansons’ partner-lead corporate team can offer advice and expertise on all aspects buying and selling a pharmacy business. For further information you can contact Ansons’ pharmacy legal team on 01543 466 660 or email [email protected].
Neil Jones, corporate associate and pharmacy specialist legal advisor at Ansons