Every contract for the sale of a pharmacy business is different, and sellers are strongly encouraged to familiarise themselves with the contract terms before signing.
In addition to key commercial terms such as the purchase price (and any adjustments), conditions precedent to completion, and arrangements for employees and stock, sale contracts will typically include terms known as ‘warranties’.
Warranties are, in effect, promises made by the seller to the purchaser. If a warranty is later found to be incorrect or misleading, the purchaser may be entitled to bring a legal claim against the seller. Warranties are often accompanied by an indemnity from the seller to the purchaser which (depending on the wording) may require the seller to compensate the purchaser for any loss suffered as a result of a warranty being incorrect.
Because every sale contract is different, the warranties it contains will also vary. Set out below are two examples of warranties commonly found in pharmacy sale contracts:
1. “Anything attached to this contract is accurate and complete and not misleading in any respect”
Documents attached to a contract may include copies of any accounts the purchaser has relied on when deciding to offer a certain price and deciding to buy the pharmacy.
A copy of the lease of the premises and a lessor’s disclosure statement may also be attached to the contract. For that reason, it is important to ensure that the lease is the most recent, complete version, and includes any variations or amendments that have been agreed.
A list of plant and equipment is also commonly attached to the contract. While the list does not have to detail every last paperclip and computer cable, it should include a reasonably full list of the main items of plant and equipment being sold as part of the business.
If any item of plant or equipment is not in good working order, the seller should inform his or her lawyer. Where appropriate, any defective or non-operational items can be disclosed to the purchaser before completion, to reduce the risk of disputes later.
Sale contracts will also typically include a warranty that the plant and equipment is in good working order. Again, if a warranty contains this promise, but this is not the case in practice, the seller should disclose this to his or her solicitor so that appropriate disclosures can be made to the purchaser, or the contract can be amended to reflect the true position.
A list of employees, potentially with their start dates, position descriptions, salary and the dollar value of their employee entitlements will usually be attached to the contract. Again, if there is a warranty in a sale contract that all annexed information is complete and not misleading, together with an indemnity for this warranty, then care should be taken by sellers to ensure employee information is accurate. This helps to minimise the risk of a future claim by a purchaser.
2. “The business is not subject to any charge, encumbrance or security interest”
Pharmacy businesses and their assets are typically subject to charges, encumbrances or security interests, and a seller may not even be aware of this.
Depending on their nature, security interests can give third parties rights to take back ownership of specific goods in certain circumstances, or to appoint a receiver to the business and sell the business and its assets if the owner defaults under the agreement with the third party. These security interests are often given in favour of suppliers and financiers.
Some sellers will have paid off their finance some time before selling a pharmacy, and may assume that as a result, no security is registered over the business and its assets. However, in practice, security interests will be registered by financiers on the national Personal Property Securities Register (PPSR) and those registrations are not always removed from the PPSR when a loan is fully repaid.
A seller, or his or her lawyer should confirm what, if any, security interests are registered over the business and its assets by undertaking a PPSR search, and ensure that any warranty in the sale contract accurately reflects the true position regarding encumbrances and security interests.
These are only two examples of the types of warranties a seller might encounter when selling their pharmacy, and the contract will likely contain many more. Given the potential consequences of breaching a warranty, sellers should obtain legal advice before signing to ensure they understand the warranties they are giving and that any necessary disclosures are made.
This article was written by Consultant Georgina Odell. Please contact Georgina if you have any questions or would like more information.
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