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Buying a pharmacy can be a solid investment if properly done. The combined market size of Canada’s nearly 14,000 pharmacies amounts to $47 billion, with profits stable over the last few years. While investing in this type of business can be lucrative, the buying process is a long and complicated one. In part 2 of our 2-part pharmacy series, we review the dos and don’ts of purchasing a pharmacy.
Before the process gets started, any potential buyer will need to go through a number of steps, such as purchase price negotiations, deciding on the purchase structure, going through a thorough due diligence period and creating a solid definitive purchase agreement.
It’s beneficial to have a solid team of professionals to help you along the way. Your team should include a lawyer, financial advisor and accountant with experience in serving healthcare businesses. Zeifmans has decades of experience in this field and can help you avoid serious tax implications throughout the sale process.
Deciding on your purchase structure
As a buyer, you’ll have to decide whether you’d like to make an asset purchase or a share purchase. Each choice has its own unique benefits and potential pitfalls.
Asset purchase:
In this case, you are buying assets of a company rather than the entire company itself. Assets can be tangible and include buildings, equipment, cash and inventory or intangible, like customer lists or goodwill.
Pros:
As the new owner, any negative history won’t follow you into your new venture. Asset sales are cash-free and debt-free transactions. In an asset purchase, the buyer won’t take on any of the seller’s long-term debt obligations.
Another benefit of this structure is that some buyers will be able to use the goodwill deduction to save on their taxes. Goodwill, in this case, refers to an intangible asset that can be created in a sale if the purchaser pays more than the agreed-upon value of the acquired assets. In taxes, goodwill is an eligible capital property that can be written off in the same way as capital cost allowances.
Cons:
There’s a lot of work that goes into asset sales, including negotiating new supplier contracts, attaining leases, credit, a new ODB number and new licenses through the Ontario College of Pharmacists.
Share Purchase
A share purchase means you’re taking over an entire company and buying shares in the pharmacy. You will be the owner of the entire legal entity.
Pros:
In most cases, a share purchase is less complicated than asset purchase, since there’s no need to negotiate new leases and credit. You’ll be able to use the previous owner’s employment agreements and ODB numbers, meaning there’s less work to do.
In terms of taxes, there are some benefits of a share purchase. As the new owner, you may be able to use any of the previous owner’s losses against your taxable income.
Cons:
Unlike an asset purchase, you won’t be able to reap the benefits of a goodwill deduction. Also, since you’re buying an established company, any debt or negative history may follow you in your new venture.
Negotiating prices
In either situation, it’s important to negotiate the terms of sale with the help of your legal and financial team. Have your accountant check that the agreed-upon price is fair and representative of the business’s true worth.
What to know when drafting a Letter of Intent
Once you’ve decided on a purchase structure, it’s time to have your lawyer draft a Letter of Intent (LOI). This is the document that details the deal’s framework, regardless of what was said verbally between you and the seller.
The following are some things you may want to include in your LOI, other than the purchase price:
- Working capital adjustments
- Non-competition and non-solicitation agreements
- Employment or transition services agreements with the seller
- Confidentiality requirements
- An exclusivity clause, which will force the seller to negotiate exclusively with you for an agreed-upon time period.
When negotiating your LOI, keep buyer entity in mind. This pertains to how you’ll be buying the company – personally, through a corporation or through a partnership. If you’re buying through a corporation with multiple shareholders, a shareholders agreement should be drafted. It should outline how decision-making and operation requirements will work for your corporation.
For a partnership, it’s a good idea to draft a partnership agreement, which would also outline decision-making and operating requirements.
If you’re unsure of buyer entity, you can still draft an LOI, just ensure your lawyer includes language that allows you to nominate another entity.
Be thorough during your due diligence period
Once your LOI is executed, you’ll enter the due diligence period of the sale. You’ll be able to negotiate the length of this period, which will allow your team to go through the seller’s operational documents to ensure there are no outstanding problems. Documents will include: corporate records, financial statements, employment agreements and contracts.
This is a good time to get to know the pharmacy’s operations and any ongoing commitments. It’s advisable to get your lawyer involved in this investigation to ensure you’re not going to assume any dubious obligations or liabilities at the end of the transaction. Watch out for:
- Regulatory violations
- Company liabilities
- Compliance issues with government departments like the CRA, or the Workers’ Compensation Board
You should also review any pre-existing contracts. Get to know the contract’s terms, such as any consent requirements (often found in supplier or lease agreements) and first-refusal rights (found in a supplier’s banner agreement).
Make sure sale agreements are in your best interest
After the due diligence period, your lawyer will start to draft the definitive purchase agreement, which details what’s expected of each party in the transaction. It typically includes:
- The purchase price and any related financial terms
- Form of payment, such as cash, shares, promissory note, etc.
- Any necessary price adjustments
- If any part of the purchase price will be held in escrow
- Any earnout provisions. A provision would make portions of the purchase price reliant on company milestones after closing
Your legal team should help ensure that this agreement is in your best interest. Factors to consider are whether the due diligence period turned up any concerning information, how financing is being arranged and whether an inventory count will be completed after closing. You should also look into obtaining receipt of any third-party approvals, such as landlord consent in any lease agreement.
Your legal team will also help negotiate representations, warranties and covenants to be included in this agreement. These are basically incentives for the buyer and seller to close the transaction. The following are a few important representations that could be written into your agreement:
- That the seller has been incorporated and has all the power and authority to own the corporation’s assets. This representation also ensures the seller has the authority to perform any obligations detailed in the definitive agreement
- That the seller has rights to any shares or assets being sold and that any financial statements, books or records are accurate and not fraudulent
- That all pharmacy assets are in good working order
- That all taxes have been paid up to the closing date and the business has complied with all applicable laws
Ensure future success with solid employment, consulting and non-competition agreements
As the buyer, the best way to move forward is often to retain the pharmacy’s current staff, including pharmacists, pharmacy technicians and general clerks. This can be done by drafting updated employment agreements during the sale process. If a pharmacist provides services as a private contractor, you’ll have to draft a consulting agreement as well. It’s important to discuss these agreements with your legal team to make sure the terms are compliant with any employment laws.
You’ll also want to consider including non-competition, non-solicitation and confidentiality agreements. This way, the seller will be unable to compete against your pharmacy once the sale is complete. These provisions often include clauses that stop sellers from working for, opening or investing in one of your competitors. Sellers will also be prevented from soliciting their former pharmacy’s employees, clients or suppliers.
These agreements will often have a designated time-period and will specify distance. For example, if the seller decides to invest in a pharmacy in another city, this most likely won’t break any non-competition agreements.
What to know if real estate is involved
Some sales will include the opportunity to purchase land or property. In this case, you’ll need to conduct additional due diligence to check that the property is in good standing. Your legal team will conduct searches to ensure the following:
- There are no outstanding realty taxes and no issues with the title
- The property meets environmental compliance
- All utility accounts have been paid and the property is in compliance with any municipal and provincial bylaws, work orders and zoning requirements
If the seller doesn’t sell the property, you’ll have to negotiate a new lease once the transaction is complete.
Ensuring a smooth transition
Buying a pharmacy is an exciting, meticulous process. It’s important to have a trusted team of experts on your side to guide you through a letter of intent, the due diligence period and the definitive purchase agreement. Zeifmans’ team works hand-in-hand with you and your legal counsel to help ensure a smooth process. Contact us to get started.
