Whenever speaking to a pharmacist who is either already in, or about to join, a pharmacy partnership, I always ask whether they have thought about their business succession strategy. For the reader who is in a pharmacy partnership, a key question to consider is “what is going to happen if you die at your dispensary”.

Life Insurance

Despite the best laid plans and intentions, a pharmacist partner’s exit from the business may be forced on them through death or disability.  Obviously to avoid anxiety when such tragic events may occur, pharmacy owners should at the outset take the time to assess and cater for their needs in these circumstances.  In particular, prudent pharmacy owners will have their own personal life insurance, superannuation and possibly other risk insurances to ensure that their families are well catered for where death or permanent disability arises.

However, in addition to personal arrangements, a pharmacist partner needs to consider insurance cover for partnership purposes given that insurance works well as a mechanism to fund the transfer of a partnership share in pharmacy business from the deceased or disabled partner to the remaining owners for proper value.

These insurances can be taken out in a multitude of ways eg. as partnership owned policies, self-owned policies, cross-owned policies or even trust-owned policies.  As there are critical tax and legal consequences associated with each policy ownership alternative, it is imperative that a pharmacist partner obtains specialist advice.

It is important to note that the insurance policy itself is not sufficient, and needs to be coupled with express written agreements between all the partners which trigger the intended consequences of such partners in purchasing the relevant insurance.

Buy/Sell Agreement

When a partner in a pharmacy partnership suffers the event of death or permanent disability, a buy/sell agreement is required to ensure that it deals appropriately with distribution of the insurance policy proceeds on the occurrence of the relevant trigger event and the consequent transfer of the departing pharmacy partner’s interest in the pharmacy business.

However, please note that the buy/sell agreement in itself is not bulletproof as a solution.  For example, it loses its effectiveness where a partner becomes uninsurable or indeed where an insurance company subsequently disallows the payment in certain circumstances (eg. material non-disclosure by the deceased or disabled person).

Part of more Comprehensive Business Ownership Agreement

In reality a buy/sell agreement is simply an agreement between pharmacy partners dealing with some but not all of the issues that they may need to have regulated between themselves.

Business ownership agreements (ie. a partnership agreement where the pharmacy is owned in partnership, or a shareholders agreement where the pharmacy is owned by a corporate entity allowed under the relevant State based pharmacy legislation) can deal with a comprehensive set of issues which affects the operation of the pharmacy business before, during and after the occurrence of the insurance pay-out trigger event.

In determining the range of issues that the pharmacy co-owners may want to cover, it is important to identify all relevant goals and plans of the co-owners as well as the needs of the business enterprise operationally so that these facts may be incorporated in the ownership agreement.

Pharmacy business ownership agreements can address a multitude of relevant issues including regulating the need for financial contributions, imposing reasonable restraints of trade and confidentiality provisions, regulating entry and exit of partners in various circumstances, detailing the working obligations of each partner at shop level, regulating the management and decision making processes, regulating management and accounting reporting requirements, imposing responsibilities to create and adopt business and budgeting plans and agreeing on policies and procedures, and outlying mediation/dispute resolution provisions where agreements arise between the parties.

In summary, while it is important to have funding arrangements in place to deal with the vagaries of life and death, rather than just focusing on a buy/sell agreement the pharmacist partners should broaden their scope and with expert legal advice develop a properly drafted pharmacy ownership agreement which should cover all aspects of the relationship of the co-owners to the pharmacy and the mechanics by which the pharmacy business will be operated.

Prepared by
Anthony Cannizzo
Partner
Robert James Lawyers
Level 10, 200 Queen Street
Melbourne 3000

Tel (03) 8628 2000
Fax (03) 8628 2050

Email: Anthony@robertjames.com.au
Website: www.robertjames.com.au