Pharmacy transactions can often be a prosperous investment for entrepreneurs who are willing to put in the hard work.
Given that healthcare demand is constant (rather than seasonal), there is often a good business case for owning a pharmacy. However, setting up a new pharmacy is notoriously difficult and features various barriers to entry, so entrepreneurs often prefer to buy an existing pharmacy.
Transaction structure
Generally, when buying a pharmacy one of the first considerations is whether to buy the goodwill, stock and assets of the business (asset purchase), or the shares of the company that owns the pharmacy (share purchase).
Each type of transaction has its benefits and risks from a tax and liabilities perspective.
However, uniquely for a pharmacy transaction, the structure also impacts the type of regulatory consent required for the new buyer to start operating the pharmacy.
Each pharmacy has a contract with the NHS and has its premises registered with the General Pharmaceutical Council (GPhC). When a pharmacy changes ownership, buyers are required to submit applications to the NHS and GPhC and seek approval regarding the ownership transfer.
The approval process can sometimes take a couple of months, so this often has to be factored into transaction timescales. On the other hand, with a share purchase, the company owner of the pharmacy has not changed as far as the NHS and GPhC are concerned, and so the regulatory requirement is lowered to require the buyer to only notify the NHS and GPhC that there is a new director / shareholder of the company, thus making share purchases more attractive from a timescale perspective.
Due diligence
As a minimum, pharmacies require the same level of due diligence that would be expected in other business acquisitions, for example involving a review of material contracts and financial records, enquiring into any litigious or solvency matters, etc.
However, the most successful pharmacies benefit from having nearby doctor surgeries, scarce competition, contracts with care homes or wider weekend opening hours.
The answers to these and other questions about the way the pharmacy trades can often be eye opening for buyers about whether a particular pharmacy is a good investment.
Covid-19
Buyers pursuing new transactions since the outbreak of Covid-19 will have entered into a completely new landscape, affected by widescale market disruption, government-imposed lockdowns triggering significant changes in law and regulation, wholesale shifts in working arrangements and widespread cash flow and liquidity issues for many businesses.
It has therefore become particularly important for the buyer’s due diligence investigations to include evaluating the impact that the pandemic has had (or may have) on the target pharmacy, and what risk mitigation it has already undertaken, with a view to ensuring that this impact has been factored into the business valuation, or otherwise adequately reflected with appropriate warranties and indemnities in the agreement.
The buyer will also want to know whether the seller has followed appropriate guidelines relating to Covid-19, for example, whether social distancing measures are in place, glass panes on tills, one way systems throughout the pharmacy, limiting the number of customers in-store, placing hand sanitiser at the door.
In addition to compliance with new rules, many pharmacies will have received business grants from local government and advance funding from the NHS Business Service Authority. Will the cash received be apportioned between buyers and sellers or will the sellers retain these wholly? An argument could be made that sellers should be entitled to reap the financial assistance received as they had to deal with the worst of Covid-19, but the buyer’s side could similarly argue that the pandemic is far from over and therefore the financial assistance should be apportioned fairly between the parties.
Points of negotiation
In addition to the impact Covid-19 has had on negotiations, there are other factors that can impact the purchase price and stock valuation during a transaction.
Purchase price
The due diligence process should reveal any previously unidentified risks, thereby safeguarding the buyer and allowing the buyer to re-negotiate key terms such as the consideration payable and include any necessary protective terms (such as relevant warranties and indemnities) in the final sale and purchase agreement.
Furthermore, key findings from the financial due diligence can often reveal director’s loans which the sellers will want repaid at completion. This can also impact the purchase price mid-transaction.
Some buyers wish to retain a portion of the purchase price (a retention), which is held in an escrow account, for a period of time until all hidden issues have been flushed out. The cost of any undisclosed liabilities is then deducted from the retention, with no additional expenditure to the buyer.
Stock valuation
One of the key assets of a pharmacy is the value of its stock-in-trade at completion.
Because of the way the stock is measured, buyers and sellers usually agree to pay for stock separately to the purchase price.
The process involves jointly appointing an independent stock valuer to carry out a stock-take on or right before the completion date.
From a buyer’s perspective, it is very important to set parameters for the valuer so that the stock is measured efficiently. For example, a buyer will usually want to exclude stock with a shelf life of less than 3 months. Or alternatively, in the Covid-19 era, a buyer may want to exclude seasonal or high value slow moving goods such as fragrances (who are we trying to impress during the lockdowns anyway?). In the meantime, the seller would benefit from parameters that are as wide as possible in order to sell the maximum amount of stock.
Buyers and sellers each have their own strategies and key considerations when buying or selling a pharmacy business.
For more information, or for expert advice on pharmacy matters, call us on 020 3475 6751 or via email at info@carterbond.co.uk
