Given the significant sale prices being achieved for pharmacy businesses and the increasing complexity associated with being a proprietor of a retail business, where should a pharmacist start if considering to buy a pharmacy outright or in partnership with another pharmacist?

Key Points

Below are some key points for a buyer to consider in order to keep out of trouble:

  • conducting a thorough due diligence both of the financial circumstances of the business as well as the key tangible attributes of the business. A prospective buyer should engage a specialist accountant well acquainted with the pharmacy industry, to examine the accounts and financial statements for the pharmacy business;
  • being actively engaged in such due diligence exercise. It is recommended for a buyer to sit down with its chosen accountant to discuss and obtain a full understanding of the due diligence material requested and examined by the accountant, including the reasons for requesting such material and the conclusions to be drawn from the outcome of such examination. This enables the buyer to gain an informed understanding both of the financial due diligence exercise being carried out and the accountant’s conclusions as to whether the proposed sale price is reasonable or not;
  • considering the current location of the business premises. A buyer should analyse the location to determine whether a site is reliant on other neighbouring businesses to draw custom to the site (eg. a nearby medical centre, large supermarket) and if so, make appropriate inquiries about the future plans of such neighbouring businesses;
  • considering the terms of the existing premises lease for the current location. A buyer needs to check important aspects such as the remaining term of the lease, whether there are any option periods, the monetary payment obligations including size and frequency of rent reviews, the obligations on the tenant to refit or upgrade the premises and the frequency for doing so. In addition, it is important to check the transfer of lease requirements in order to obtain the landlord’s consent to such transfer, including whether there is any ability for the landlord to request an increased security deposit from the buyer on assignment;
  • considering the possibility or likelihood of another PBS pharmacy being established in close proximity to the current location. While the Pharmacy Location Rules generally restrict and govern where new PBS approvals can be obtained, a buyer cannot assume that these Rules will protect them from new competition for various reasons. Obviously, the Rules can be amended by the Commonwealth Government at any time (as history has shown on numerous occasions). However, it is vital to be aware that a typically ignored reason (which is very well known to the writer via extensive experience in this specialist area) is the legal fact that the Federal Health Minister has a personal power to grant a new PBS approval in certain circumstances where a PBS approval application has been rejected under the Pharmacy Location Rules
  • carrying out full due diligence on the staff of the business – this analysis should focus not only on current employees, including whether there are any key employees which must be retained, but also in determining if there are any former key employees who have recently left to work with nearby competitors (as damage to the business goodwill may not be readily identifiable);
  • (as is now more often the case given the high market values of pharmacies), in circumstances where you are considering buying a partial business interest and becoming a partner with the existing operator, you need to conduct a careful “due diligence” analysis of your prospective partner. This analysis should involve sufficient discussions and meetings with your prospective partner to enable you to work out whether you feel you will be comfortable being in partnership. Relevant issues may be to find out whether the existing owner has previously been in partnership and, if so, the circumstances of such partnership. Only once you have answered this threshold question should you move to discussing the key provision of a partnership agreement, eg. working obligations and conditions, options to buy additional partnership interests, method for determining purchase price when buying out a partner’s interest, post- partnership restraints of trade.

In conclusion, all prospective pharmacy buyers need to be prepared to fully devote their time and effort, utilising the assistance of appropriately qualified and pharmacy industry experienced accounting and legal advisors in critically analysing the financial, legal, geographical and physical attributes of the business they are looking ay buying.

Prepared by
Anthony Cannizzo
Partner
Robert James Lawyers
Level 22, 140 William Street
Melbourne 3000
Tel (03) 8628 2000
Fax (03) 8628 2050
Email: anthony@robertjames.com.au
Web site: www.robertjames.com.au