An Offer to Purchase or Heads of Agreement (“Offer”) is typically the first document provided to a buyer in a proposed pharmacy business sale transaction. It is a common fallacy that all initial Offer documents are “standard”. Signing Offers that are not carefully drafted or before seeking legal advice may lead to a range of unintended financial and legal consequences.
Is an offer binding?
You may think that until you sign a formal contract of sale that you are not legally bound. Unfortunately such a belief is mistaken as Courts have found that even email correspondence between buyer and seller may in certain circumstances constitute a binding intention to create legal relations.
If you don’t intend to be legally bound, proceed with caution when negotiating an offer to purchase. The best safety net would be to engage legal assistance to represent you in the negotiations.
If you do want your offer to be binding on the seller, the easiest way to make an Offer binding on the parties is to include an express statement that the Offer constitutes a binding legal agreement for the purchase and sale of the pharmacy.
Before making an offer
While it may not be commercial to carry out a detailed legal due diligence of the business prior to making an Offer, some limited key investigations should always be carried out.
From a legal perspective, a business premises is a key component of a pharmacy business. The likelihood is you will be taking a transfer of the vendor’s existing premises lease.
Recently, a client was rejected finance approved because of an insufficient term left on the premises lease. Another client was exposed to unexpected fees for a storage licence they were not aware existed. In both these instances each client had failed to instruct us to undertake a review of the premises lease documentation so that by the time these issues were brought to light, a blinding Offer had been signed, limiting the buyer’s options.
Before making an offer to buy the pharmacy, the seller should be requested to provide you with a full copy of the lease and landlord disclosure statement (including all renewals, variations and transfers) so that you can have these documents reviewed from a legal perspective and obtain advice on your obligations as tenant. If you’re obtaining finance, you should also consider the length of the term left on the lease and whether this will satisfy your financier’s requirements.
What goes into an offer?
- Staple Terms
An Offer should include “staple” terms including the parties’ details, purchase price, maximum stock value, settlement date and payment terms.An initial deposit (of up to 10%, noting this is negotiable) is usually payable to the vendor’s pharmacy broker which can be broken up between a nominal deposit on acceptance of the Offer and the balance upon signing a Contract for Sale.Being a pharmacy business, the Offers should always be subject to the relevant approvals from Medicare and the applicable State Pharmacy Authority being granted to the purchaser on and from settlement.
- Finance approval
If you are obtaining finance to assist with your purchase, you should request the Offer be subject to receipt of finance approval within an agreed period of time e.g. 30 days from the date of the seller’s acceptance of the Offer.
- Due Diligence
Unless you have already carried out a thorough legal and financial due diligence of the pharmacy business, the Offer should be subject to such investigations being completed to your satisfaction within an agreed period e.g. 21 days from receipt of the requested information from the seller. Well executed due diligence investigations can reduce the risk of unforeseen issues. For example, if the pharmacy is within a medical centre, buyers have been caught out by subleases which terminate if the medical centre operator’s head lease terminates.
- Conditions Precedent
Consider what specific issues are key to you as a buyer and need to occur before settlement, or continue despite settlement. For example, if the pharmacy currently operates under a franchise or provides services to nursing homes, is the Offer subject to the transfer of the Franchise Agreement and the applicable nursing home agreements?
Who’s on your team?
It is important to work with the right team of experts and engage them at the right time during your purchasing process.
Your lawyer plays a key role in the offer process – they are looking after your interests. A seller will not re-negotiate a key term of an Offer or agree for it to be subject to an additional condition precedent, after the Offer has already been signed.
By engaging a lawyer with experience in pharmacy transactions and commercial negotiations early on in the negotiations, you are better placed to ensure the Offer reflects a satisfactory commercial arrangement.
T: (03) 8628 2012
T: (03) 8628 2039
Robert James Lawyers
Level 10, 200 Queen Street, Melbourne Vic 3000