Purchasing or selling a pharmacy is usually an exciting time, but it can also be a frustrating period if you don’t have service providers with knowledge of the pharmacy industry driving the transaction.
In a transaction context, solicitors predominantly add value by negotiating contractual terms that provide certainty for their clients. A purchaser needs certainty that they are buying what they think they are buying. A vendor needs certainty that following settlement, they can move on without worrying about a dissatisfied purchaser making a claim against them.
While we may add value through contractual negotiation, from a practical perspective, our work has only just begun once contracts have been exchanged- we need to work with you to get the deal over the line.
Satisfying the conditions precedent to settlement is the first task.
Due Diligence
Contracts for the sale of pharmacy businesses are generally subject to the purchaser undertaking and being satisfied with its due diligence investigations.
As a vendor, it is important that your solicitor drafts the due diligence clause carefully to limit the purchaser’s ability to withdraw from the transaction for some fact discovered during due diligence that does not adversely affect the value of the business.
As for due diligence requests themselves, you should provide the purchaser with requested information as soon as possible as due diligence periods usually only commence once the purchaser has been provided with requested information.
Finance
Vendors should ensure that their solicitors draft finance conditions carefully to limit the ability of the purchaser to use their failure to obtain finance as a reason to withdraw from the transaction.
If you are purchasing, then you should review the contract carefully to determine your obligations to obtain finance. A finance condition will generally oblige a purchaser to use its best endeavours to obtain finance for a specific amount as quickly as possible.
If you don’t satisfy these specific obligations then you will not be able to withdraw from the transaction if you are not successful in obtaining the finance. This will generally result in you not being able to settle, which will enable the vendor to terminate the agreement and keep your deposit.
Transfer of Lease
Landlords can be notoriously slow to approve a transfer of a lease to a purchaser. Put bluntly, there is nothing in the transaction for the landlord other than the hassle of assessing an incoming purchaser to determine the likelihood of the purchaser meeting the obligations under the lease.
Because of this, landlords will usually try to obtain something out of the transaction. Often this is demanding an increase in the level of the security deposit, which may impact on the purchaser’s cash-flow and cause a delay to settlement.
The best way to deal with a landlord is to give them as much reasonable information about the incoming purchaser as soon as possible. This would ordinarily include providing references from the purchaser’s other landlords, accountants, bankers and major suppliers, as well as providing a personal asset and liability statement certified by an accountant.
The more comfort you provide the landlord from the beginning, as opposed to providing information in a piecemeal manner, the easier it should be to obtain the landlord’s consent without them demanding an increase to the security deposit.
Medicare and Pharmacy Board Approvals
Obtaining Medicare’s and the pharmacy board’s consent to the transfer of ownership should be a straightforward process if you meet application deadlines.
However, one potential pitfall is that Medicare requires a document signed by the landlord, the vendor and the purchaser confirming that the lease will be transferred to the purchaser from settlement. Medicare will only issue an administrative number once they have received this evidence.
Landlords not familiar with the realities of pharmacy businesses may be reluctant to sign a document such as this, so it is important to raise this with the landlord as soon as possible.
Mortgage of Lease
As a result of a number of high profile pharmacy business failures in recent years, financiers are commonly requiring landlords to consent to them taking a mortgage over the lease as a condition to them providing finance.
Although generally not a condition precedent to settlement, obtaining the landlord’s consent to the purchaser’s financier taking a mortgage over the lease can in effect be a condition to settlement- if the financier does not provide the finance, then settlement is unlikely to occur.
A mortgage of lease enables a financier to step into the shoes of a tenant and to operate the tenant’s business where the financier calls on its security because the tenant has failed to make repayments to the financier.
As a mortgage of lease can restrict some of the rights of a landlord, landlords are generally reluctant to consent them. This can be a major road-block to settlement, but in the current business climate, it is a reality that needs to be dealt with.
If the financier requires a mortgage of lease, then this should be raised with the landlord as soon as possible. This will give the parties an idea of the likelihood of the landlord consenting, which will give the purchaser as much time as possible to arrange alternative security to satisfy the financier if the landlord will not provide its consent.
Settlement delays cause a great deal of angst and inconvenience: the vendor has probably already moved on from the business in their mind, employee entitlements and other adjustments need to be recalculated and stocktakes need to be re-booked or re-done. This can be stressful for the vendor and the purchaser.
Engaging professional advisors with knowledge of the pharmacy industry who will drive the transaction will go a long way to ensuring that you can transact with certainty and without stress.