LAW: Staying ahead of the game

Sam Milne outlines the process in making that all important decision to sell your pharmacy….

The process of selling a pharmacy can be quite involved and time consuming. Sellers will be asked to provide detailed information about the pharmacy they are selling, whilst negotiating the terms and practicalities of the sale itself. Owner managers will also have the added responsibility of running the business at the same time.

Having to balance these work streams does mean that the sale process can be stressful for sellers and the added workload does also give rise to the potential for delays to the sale process.

In our experience in acting for sellers of pharmacy businesses, we often recommend a number of pre-sale actions that prospective sellers can take in order to reduce delays, minimise stress and set themselves up for success.

Compiling documents

One of the first things that a buyer will wish to do when their offer for a pharmacy is accepted is conduct an investigation into the pharmacy to build up a complete picture of the business they are looking to buy.

This is called a ‘due diligence exercise’ and there are a number of reasons for doing this: firstly buyers will have to take over the day to day running of the business when the sale completes, and secondly buyers will wish to ensure that they are not inheriting any unknown liabilities (which may not have been detailed in the marketing material).

The buyer’s lawyer will generally circulate a questionnaire to all sellers asking for both information about the pharmacy and also for copies of relevant documents (commercial contracts, insurance paperwork, employment contracts etc).

This process is the most likely aspect of a transaction to cause stress and delays, as sellers have to juggle managing the business with answering the buyer’s questions and locating relevant documents.

This means that it can take some time for responses to due diligence questions to be provided. We therefore advise sellers to begin collating important documents and information as soon as they can in advance of their business being marketed for sale, so that they are then able to provide replies to due diligence enquiries quickly and with minimal business interruption. This also helps to avoid a buyer asking for updated information if a transaction is delayed.

Some examples of the key items we would suggest collating at an early stage are set out below:

Ownership information

If the pharmacy is being sold via a company sale, a buyer will request key documents evidencing the ownership and control of the company, including shareholder certificates, shareholder registers and any shareholder agreement.

It can be useful to check these are easily accessible, up to date and align with your understanding of the business before the sale process begins.

Key contracts

A buyer will want to review the business’ key contracts, including:

• employment contracts;
• contracts with key suppliers and customers, including details of any PMR supply/leasing agreement;
• details of any regulatory licences or approvals (such as wholesaler dealing or visa sponsorships of overseas workers);and
• any other key contracts e.g. telephone contract, payroll provider, credit card terminals etc.

We would suggest ensuring that sellers have fully signed and dated copies of these contracts, so that they can be provided to the buyer quickly.

Finance

Buyers will expect to be provided with details of the business’ financial arrangements, in order that they can review its historic performance. If the purchase is being funded by a bank or other financial institution, the buyer’s funder may also require evidence of established trading and profits generated by the business. As a starting point, we would suggest ensuring that copies of the business’ annual accounts, FP34 statements and tax returns for the previous 3 years are available so that they can be provided to the buyer at an early stage.

NHS contract

The key asset for any NHS pharmacy is its NHS contract. Buyers will therefore wish to ensure that they will be inheriting the NHS contract as part of the transaction.

If the business is sold via a company sale, the NHS contract is almost always held by that company. However, our experience tells us that such expectation does not always bear out and sellers can discover that the NHS contact is actually held by them personally or perhaps a previous owner.

In this scenario, a change of ownership application to NHS England would need to be made in order to move the NHS contract into the company’s name. This process can take between 3-4 months and so can disrupt the time frame of a sale process.

We would therefore suggest sellers make enquiries to confirm that their company is the holder of the NHS contract before the sale process commences (and we at Charles Russell Speechlys can assist with this).

Where a business is sold via an ‘asset’ sale, the NHS contract will need to be transferred into the name of the buyer, and so a change of ownership application to NHS England will need to be made.

Once the application is made, control of the process is passed to the buyer who then has the power to request that NHS England amend the pharmaceutical list without further recourse to the sellers.

Sellers can therefore be hesitant to complete the application forms at the beginning of a transaction (as they do not yet know for certain whether the deal will go ahead). This could mean that there is a delay whilst the transaction documents are drafted, and only when they are signed is the change of ownership application made (which then takes a further 3-4 months to be processed).

At Charles Russell Speechlys, we have developed a form of contract which protects the interest of the selling party to the NHS contract in the event that NHS England amend the pharmaceutical list before the transaction documents have been signed. This allows the application to be made at the start of a transaction, and avoids waiting until the transaction documents have been agreed.

The above is a general overview and we recommend that independent legal advice is sought for your specific concerns. If you require further information in relation to the points raised in this article you should contact Samuel Milne who is a solicitor and associate in the Healthcare Transactions Team at Charles Russell Speechlys LLP. He can be contacted at Samuel.Milne@crsblaw.com.