INSIGHTS: Aim for a pain-free goodbye

March 10, 2016

Author

Georgina Odell
Special Counsel

Meridian Lawyers assists pharmacists across Australia with the sale and purchase of their pharmacies. Whether you have negotiated a sale yourself or through a business broker, you will need a solicitor with pharmacy experience to prepare and negotiate the contract of sale, and manage the transaction through to completion on your behalf.

Here is a brief overview of the legal process, together with tips on how to make the process as pain-free as possible.

Step 1 – Gather information about your pharmacy

The pharmacist selling the business (vendor) will be expected to produce the contract of sale for the purchaser to consider.

The contract is a technical legal document, and it will be necessary for a vendor to instruct a lawyer to prepare this on his or her behalf. Given that the sale and acquisition of pharmacies give rise to unique challenges, we recommend a pharmacy lawyer be retained to prepare the documents.

The vendor’s solicitor will need important information and documents concerning the pharmacy.

For example, the vendor’s solicitor will need to see a copy of the lease of the premises and any lessor’s disclosure statement. The vendor may need to produce a copy of the development approval for the premises, and other documents such as a list of equipment being sold, a copy of the certificate of registration of the business name (if any), details of the vendor’s employees (as a minimum their names, start dates, positions, employment status and current entitlements), a copy of the certificate of registration of any trade mark, and a copy of any current franchise agreement or other contracts (such as nursing home contracts, security contracts, software agreements, fit out leases etc).

Vendors save time, and also potentially save legal costs when they have information about the pharmacy and copies of key documents ready to instruct their solicitor in one go.

Step 2 – Prepare the contract

Whilst preparing the contract, the vendor’s solicitor should advise regarding special conditions the vendor may wish to include.

For example, your solicitor may include terms which:

  • exclude warranties about the condition of equipment;
  • exclude warranties about the takings of the business and require the purchaser to rely on their own enquiries;
  • require the purchaser to provide a personal guarantor where the purchasing entity is a company;
  • require the purchaser to pay interest on the purchase price if completion is delayed; and
  • indemnifies the vendor against breach of any continuing agreements (including the lease) after completion.

With pharmacy sales there are always conditions precedent in the contract that require the approval of the relevant pharmacy authority to the proposed change of ownership (in New South Wales the approval of the Pharmacy Council of New South Wales is required, and in Victoria the approval of the Victorian Pharmacy Authority is required), and the provision of a new Medicare approval number to the purchaser.

It is important to instruct a solicitor who has good experience of pharmacy sales and purchases in order to ensure that the necessary conditions are contained in the contract.

Additional conditions precedent may be required according to the individual circumstances of the pharmacy.

The vendor will also need to stipulate how employees are to be dealt with on the transfer.  Is the purchaser going to be free to offer employment at its discretion or does the vendor wish to require the purchaser to offer employment to all current employees on their current terms and conditions?

The contract will need to state what employee entitlements are to be paid out by the vendor on completion, and what entitlements will be the subject of an adjustment to the purchase price where the liability is being taken over by the purchaser. If your solicitor does not advise you about this, be sure to ask before you make any payments.

The contract will generally contain a set of promises or warranties by the vendor. You should familiarise yourself with those promises before exchanging contracts to ensure that you can comply with them, and if you cannot comply with any promise you should seek legal advice about whether to disclose this to the purchaser.

Once prepared, the vendor’s solicitor will send the draft contract to the purchaser’s solicitor.

Step 3 – Exchange contracts

When each party’s solicitor is happy with the terms and conditions, the contract will be legally exchanged and the purchaser will pay the deposit, usually to the vendor’s agent or solicitor to be held in a trust account pending completion.

From this point on, there is a legally binding agreement to sell and buy, subject to the conditions precedent being satisfied.

Unlike many other business sales, with a pharmacy sale or purchase there is considerable work to be done by the solicitors after exchange and in the run up to completion.

That work often includes:

  • obtaining the consent to assignment of the lease from the lessor and agreeing the wording of the Deed of Consent to Assignment;
  • obtaining the consent of the lessor and any mortgagee of the premises to granting a mortgage over the lease and Right of Entry Deed to the purchaser’s bank;
  • arranging the stock take just prior to completion; and
  • securing a new lease for the purchaser if the vendor’s lease has expired.

Generally, the contract of sale will oblige the vendor to maintain the goodwill of the pharmacy and carry on business in a proper and business-like way, after exchange and up to completion, and ensure that the pharmacy is run as a going concern.

Vendors will often also be under obligations to maintain the equipment and comply with the lease, and not to offer stock for sale as a ‘closing down sale’ or sell it at less than the prevailing retail price.

Vendors should seek advice from their solicitor before granting or varying any employee entitlements after contracts are exchanged. The contract of sale may contain prohibitions on such changes.

Step 4 – Completion

The parties’ solicitors will liaise with each other to agree the time and date for completion, and make sure that all documents required to be handed over are ready in time.

The vendor will be asked to provide the purchaser with ‘cheque directions’, which set out the cheques that the purchaser must produce at settlement, the payees and the amounts.

The vendor must make any employee entitlement payments required under the contract, and the purchaser’s solicitor will provide an ‘Order on Agent’, which authorises the vendor’s agent or solicitor to release the deposit being held in their trust account to
the vendor.

Where the vendor has bank borrowings secured over the business being sold, the vendor’s solicitor will arrange for the vendor’s bank to attend settlement and hand over releases of security interests in return for settlement cheques repaying the borrowing.

It is important to let your bank have plenty of warning of settlement meetings to ensure that they can attend and prevent completion being delayed.

TIPS FOR SELLING YOUR PHARMACY:

  • Gather all relevant information and documents together and send them to your solicitor in one go.
  • Be aware of the promises contained in the contract of sale and the restrictions that are placed on vendors once contracts are exchanged.
  • Be prepared to commit time to fulfilling the conditions precedent and preparing for completion – there is much to do.
  • Ensure that your financier has sufficient warning of the impending sale and discharge of loans and security interests.

In NSW, pharmacists are required to provide the Pharmacy Council of New South Wales with Notice of Disposal of a pecuniary interest in a pharmacy within 14 days of ceasing to hold that interest.

Please contact Mark Fitzgerald on T: 03 9810 6767 (Melbourne) or Georgina Odell on T: 02 9018 9975 (Sydney) if you would like to discuss buying or selling a pharmacy.

This article was published in the Autumn edition of Pharmacy insights.