Are you a young pharmacist who is working as a managing pharmacist in a large pharmacy and wondering how and when will you ever be able to afford to buy an interest in such a pharmacy, given the constant increase in pharmacy prices?

Have you been fortunate enough to receive an offer from the owner of this large pharmacy in which you are presently working, to purchase a minority interest at an “attractive” price (according to the owner who happens to be your boss).


How should you consider or assess this offer, especially given the dynamics in the existing relationship between you as employee and the pharmacy owner as employer.

Case Study

By way of example, let’s consider the case of Max Factor, a young up and coming pharmacist who has been working for the last 3 years in the large franchised Perry Black Chemists shop at the pre-eminent Chadrock Shopping Centre.

After close of business one night, Max was approached by the successful pharmacy owner, Nick O’Rette, with what Nick considered to be a very generous ownership opportunity.  Nick sat down with Max and explained to Max that while his Perry Black pharmacy business was worth $10 million, in recognition of young Max Factor’s hard work and commitment to the business, Nick was willing to sell Max a 15% share in the business for $1 million, effectively giving Max an extra 5% interest “for free”.

Max Factor’s initial reaction was one of great surprise and thanks to his boss Nick O’Rette for being so considerate.

Nick O’Rette then mentioned to young Max that he would need to raise the purchase moneys of $1 million from his own sources and would not be able to use the pharmacy assets to secure any loan which Max Factor would need to take out, as Nick O’Rette was already using the pharmacy business assets to secure his own borrowings of $7 million.

Young Max Factor then went off home and spoke to his parents about this attractive business proposal which, in his mind, was “an offer too good to refuse”.  His parents, who were keen to support Max in achieving his ambition of becoming a pharmacy owner, offered to allow Max to use their fully owned family home as security to raise the necessary $1 million.

Max was very happy with this kind offer from his parents, but before proceeding, his father advised him to seek the experienced advice of both a lawyer and an accountant who worked extensively in the pharmacy area.

At the end of this process of getting expert advice, Max Factor (and also importantly his parents) were very appreciative of this wise counsel that had been obtained.  In summary, this advice identified many relevant considerations including the following:

  • did the Perry Black pharmacy really have a current market value of $10 million?  (To answer this, an independent valuation report was required which confirmed it was only worth $8 million);
  • did Max understand that the 15% business interest acquired by him would act as security for Nick O’Rette’s existing $7 million loan facility secured against the pharmacy business so that Max Factor effectively became a guarantor of Nick O’Rette’s loan?  (Max Factor was not aware of this);
  • had Max Factor received any loan details confirming whether Nick O’Rette would be able to still meet his loan obligations out of Nick’s future reduced 85% share of profit from the Perry Black business?  (Max Factor had not been provided with this loan information, which information showed that Nick O’Rette would struggle to continue servicing his existing loan);
  • was Max Factor aware of what Nick O’Rette intended to do with the $1 million sale proceeds?  (Max Factor had not been advised, with Nick O’Rette’s intention being to use the proceeds to purchase a holiday apartment in Noosa rather than paying down his $7 million loan);
  • had Max Factor been provided with a copy of the current Chadrock Shopping Centre premises lease to confirm that the business had lengthy security of tenure?  (No, Max Factor had not been provided with a copy of the lease, which as it turned out only had 2 years left to run with no option term);
  • had Max Factor been provided with a current copy of the Perry Black franchise agreement held by Nick O’Rette?  (No, Max Factor had not been provided with a copy and as it turned out, the franchise term was due to expire in 6 months and the franchisor was requiring the business to undertake a complete re-fit in order to receive a new franchise term).

Conclusion

In view of rising market values, the inability to attract and retain committed full-time pharmacists and extended trading conditions, eg. 7 day trading, means it is extremely common for current pharmacy owners to look to secure potential junior owners by offering them an opportunity to buy in on supposedly favourable terms.  However, as the above case study illustrates, it is very important that any potential buyer obtains expert legal and accounting advice and undertakes a full due diligence analysis of the pharmacy before accepting any offer, in order to determine whether the offer is indeed “too good to refuse”.

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