As the owner of an established pharmacy business are you at a stage in life where you are considering winding down your working hours? And are you having difficulty in attracting and securing quality employee pharmacists?

In either case, you need to plan and consider an appropriate business succession strategy which in all likelihood, could see you introduce a new partner to the business, by way of selling a partial interest in your pharmacy business. The details of any such partnership arrangement need to be carefully considered at the outset, as the legal and business repercussions of a failed partnership are serious.

Individual Liability of each Partner
One of the most important issues to consider in taking on a new partner is that under a partnership arrangement, each partner has an unlimited liability in the partnership.

Case Study
By way of illustration, let’s consider the case of Gough Alixa an experienced 50 year old sole pharmacist proprietor with no debt secured against his regional pharmacy business. Gough Alixa is seeking to ease up his working hours and decides to sell a one-third share in the business to his 28 year old assistant pharmacist  Col Gate who has been working in the business for 2 years.

Given the upsurge in market prices for pharmacy businesses, to acquire his interest Col Gate needs to borrow $600,000.00 from the Bank (supported by a drug wholesaler guarantee).  As a young pharmacist with minimal assets Col Gate is advised that his loan facilities will need to be secured by mortgages over the pharmacy business and the lease of the business premises.

Gough Alixa is informed by Col Gate of the Bank’s requirements. In effect by consenting to the granting of these mortgages of business and lease, Gough Alixa is personally guaranteeing Col Gate’s business loan.  Apart from this personal guarantee, Gough Alixa is also putting up his remaining two-thirds interest in the pharmacy business as security for Col Gate’s loan.

As can be seen from this illustration, Gough Alixa has to decide from the outset whether he is willing to act as a guarantor for his younger partner, Col Gate.

After weighing matters up, if Gough Alixa decides to proceed with this sale, there are a number of possible strategies he can seek to put in place (via a properly drawn up partnership agreement or separate legal documentation with Col Gate) to ensure that Gough Alixa’s own interests are best protected.

For any pharmacist in Gough Alixa’s shoes, these strategies (and their relative pro’s and con’s) are best discussed with a legal advisor with extensive experience in pharmacy transactions, especially those involving partnership interests and the related financing security documentation.

Other Important Partnership Considerations
In brief, the proprietor who sells a part interest to an incoming partner must also consider other important partnership considerations including:

  • the role of each partner in the partnership (eg. will each partner have an active role or will the new partner act as day-to-day manager with the original proprietor taking a back office role);
  • how will remuneration be determined (and reviewed) at a working salary level (treated as a working expense of the (partnership) and the profit distribution level;
  • how will management decisions be determined (ie. will any partner have a right of veto) and if not, what deadlock provisions will be applied;
  • will any partner have the ability to either buy out the other partner or purchase an additional interest in the partnership, and if so how will the purchase price be determined;
  • what types of restraint provisions will apply against each partner both while the partnership operates and once the partnership ends, in circumstances where one partner continues to operate the pharmacy business.

Again, there are many other partnership issues which may also need to be considered.

Conclusion
The concept of pharmacy businesses being owned and operated in partnership is becoming more and more common, driven by such factors as rising market values, the inability to attract pharmacists to regional areas and extended trading conditions (eg. 7 day trading).  In recognition of this, existing pharmacy owners need to ensure that before entering into a partnership relationship they have itemised the key terms and conditions of any proposed partnership and carefully considered all the repercussions of such a legal arrangement.  Pharmacists who ignore these recommendations do so at their own peril, as a partnership operating without the existence of a properly drawn-up and considered partnership agreement is a potential financial and legal time-bomb.

Prepared by
Anthony Cannizzo
Partner
Robert James Solicitors
Level 10, 200 Queen Street
Melbourne     3000
Tel (03) 8628 2000
Fax (03) 8628 2050
Email:  anthony@robertjames.com.au