It is never easy selling a pharmacy, especially when you have built it up over a long period of time, established a reputation in the local community and have become very accustomed to serving patients for many years.
Whatever the reason behind the decision to sell your pharmacy, it’s important to give yourself enough time to prepare your pharmacy for sale, for two primary reasons; (1) it will help you get the best value for your business and (2) buyers often look for a number of factors when conducting due diligence and to speed this process up, it helps to have all the necessary information and documents ready.
There are a number of steps involved in a pharmacy sale, and this article covers some key points to help you prepare for a smooth transaction.
Pharmacy valuation
Before selling any business, it is imperative to know what value you are likely to achieve on the market.
A pharmacy’s value can be based on a number of factors, including but not limited to a multiple of profits or turnover as stated in the pharmacy’s last annual accounts, and the number of items dispensed per month and average item value.
There are a number of pharmacy specialist agents who can help value your pharmacy and put it to market. If you are intending to sell your pharmacy privately, your accountant can advise on the valuation.
Which type of sale structure suits your requirements best, an asset sale or a share sale?
Asset sale
If you own your pharmacy as a sole trader or partnership, then the pharmacy will be sold as an asset sale, which means that the buyer can pick and choose exactly which pharmacy assets are required and the price is agreed accordingly.
In an asset sale, the seller transfers specific assets and liabilities of the pharmacy to the buyer. This can typically include the pharmacy’s goodwill, stock, inventory, equipment, PMR system, EPOS, supplier contracts. The seller retains ownership of any cash in the business and any other assets that are specifically stated to be excluded from the sale.
The buyer will assume ownership of the assets but not the liabilities of the pharmacy. This means that the seller is generally responsible for any outstanding debts of liabilities associated with the business before the sale. The buyer will be responsible for the pharmacy after the sale.
However, as the NHS Contract needs to be transferred, the buyer will need to make a change of ownership application which can take anywhere from 3 – 6 months (and sometimes longer) to be approved. The pharmacy premises also need to be transferred to the buyer and it can take time to achieve the consent of third party landlords to transfer any existing leases.
Company / share sale
If you own your pharmacy through a company, you can still choose to sell the pharmacy assets of the company, or you can sell the entire company to achieve a clean break.
In a share sale, the seller transfers ownership of the legal entity that operates the pharmacy to the buyer. The buyer therefore takes over all assets, liabilities and obligations of the company. This includes any existing tax liabilities debts or legal claims associated with the pharmacy.
As the NHS Contract is held in the company, a company sale can be quicker since a change of ownership application is not required by the buyer, since the buyer essentially steps into the seller’s shoes and continues to run the NHS Contract through the company. If lease is in the company name, there is no need to obtain landlord consent to assign the lease to the buyer, as it stays in the company.
One of the disadvantages of a company sale is that, whereas in an asset sale the stock is paid for shortly after completion (e.g. within 1 month), in a share sale, there is a more complicated completion accounts exercise that the accountants deal with after completion, which often takes 3 – 6 months to complete. The stock and any excess cash in the company is paid from the buyer to the seller once the completion accounts exercise is complete. There are ways to ask a buyer to make a payment on account for stock and excess cash and we would be happy to discuss this with you and your accountants.
The legal process
Once the pharmacy valuation is complete, the structure is decided, a buyer is found and any agreed exclusivity deposits are paid, the legal process can commence.
There are 3 – 4 main aspects that comprise the legal process in a pharmacy sale, which includes the (1) corporate / pharmacy side, (2) property, (3) buyer’s lending and seller’s existing lending and (4) if required, the NHS change of ownership process.
The commercial / pharmacy aspect deals with the sale and purchase agreement and other ancillary documents, for the sale of the pharmacy which involves obligations from both parties including price and payment provisions, and restrictive covenants, warranties and indemnities that are required from sellers. Sale and purchase agreements generally place a number of obligations and conditions on sellers to ensure that a buyer is not left with hidden liabilities. It is therefore important to ensure that sellers disclose as much about the pharmacy as possible to avoid the buyer attempting to make claims after completion for
breach of warranties. The corporate / pharmacy aspect also involves the due diligence process, which involves the buyer’s requesting and sellers providing information about the pharmacy to allow the buyer to assess any risks.
Some key areas are:
- Accounts, FP34s and financial information
- Staff information and contracts
- Key contracts such as supplier agreements for wholesalers, equipment (e.g. PMR)
- Insurance policies
- Compliance certificates such as GPhC registration, ICO registration and confirmation that the pharmacy is included on the NHS Pharmaceutical List
- Health and safety documentation such as fire risk assessments, asbestos surveys, gas safety certificates, electrical installation certificates
The property aspect involves providing evidence to the buyer of the pharmacy’s entitlement to operate in its premises, by providing a copy of the lease (if the freehold is not owned by the sellers) and title registers. The buyer also raises a number of property enquiries to ask about rent reviews, any issues with the property’s condition or with the landlord or any neighbours, and confirmation that the sellers have complied with planning and building regulation requirements when operating the pharmacy. If the sellers own the freehold and wish to grant a lease to the new pharmacy owner, then we can help prepare the lease and advise on the lease negotiations during the process. If the lease is with a third-party landlord, then the parties often enter into a licence to assign with the landlord to transfer the remaining term of the lease to the buyer.
It is important to be aware that the property aspect can be made difficult by third party landlord who may require the sellers to remain as guarantors under the lease, or could ask for a large rent deposit from the buyer which could make budgeting for the transaction difficult. The buyer will also likely require a new 15-year lease for the pharmacy which is a common requirement of most buyers’ lenders. Prudent sellers therefore enter into a new lease with the landlord prior to the pharmacy come to market for a 15-20 year term, so that during the sale process, the buyer and their funders’ lease requirements can be more quickly satisfied by the existence of a lease for the required minimum term.
The lending process from the sellers’ perspective involves ensuring that the sellers’ existing lenders are aware of the sale. We can help with redemption of the loan and discharging any existing security against the pharmacy or the property for completion. The lending process from the buyer’s perspective involves a number of due diligence queries that the buyer’s lender will have, such as the provision of a fire risk assessment, asbestos survey, EPC, proof of ownership of the NHS Contract (to name a few). It is important for sellers to be aware of
the buyer’s lending requirements and help with satisfying these as the buyer’s lending is critical to fund the transaction and reaching completion.
The NHS change of ownership process is as discussed earlier in the article, and in summary, there is no pre-completion approvals required in a company sale. However, in an asset sale, the buyer is required to make an application for the change of ownership of the NHS Contract which can take 3 – 6 months (or more).
Employee transfers
Advising on employee transfers form part of the legal process, but it is worth explaining what this entails.
Employees are protected by the Transfer of Undertakings (Protection of Employment) Regulations 2006, which means that an employee’s position or terms cannot be made worse as a result of the sale of a business.
These regulations apply to all employees, including part-time employees and the below is a list of key points to consider:
- Employees retain their position as well as terms and conditions of their employment, despite change in ownership
- Sellers must provide the buyer (new employer) with written details of all the employees who will be transferred, including key terms of employment and staff contracts
- Sellers must inform staff regarding the pharmacy sale before completion (we can discuss the exact timing of the staff notifications with you as it can vary)
- Buyers must notify the seller and the staff that they do not intend to change any employment terms, or if they wish to change the terms, the exact details of the change and the reason for the change.
- Employees are entitled to object to the transfer of their employment to a new buyer without giving a reason
Why use Carter Bond when selling your pharmacy?
Pharmacy sales have many aspects that need to be dealt with in order to achieve a successful completion.
With the right solicitors guiding you, the pharmacy sale process can be made smooth whilst ensuring that you are the necessary advise to know where you stand during and after the sale process.
Carter Bond is ranked with the Legal 500 for Public Sector (Healthcare) work and we complete at least 60+ pharmacy transactions per year.
Carter Bond is also the only law firm to be a recommended business partner of the National Pharmacy Association (NPA).
If you have any queries regarding this article or your pharmacy sale or purchase, please contact Reena Popat at reena@carterbond.co.uk or Hammad Naveed at hammad@carterbond.co.uk. Or call us on 020 3475 6751 or visit our website www.carterbond.co.uk We are happy to help!
This note comprises the view of the author at the time of writing. This note is not a substitute for legal advice. Information may be incorrect or out of date and may not constitute a definitive or complete statement of the law or the legal market in any area. This note is not intended to constitute advice in any specific situation. You should take legal advice in specific situations. All implied warranties and conditions are excluded, to the maximum extent permitted by law.
