High purchase prices and current bank lending policies mean that often the only way a young pharmacist can gain an ownership interest in a pharmacy is by buying into a partnership or a company that operates a pharmacy.
Although partnerships have long been the staple entity through which pharmacy business have been conducted, today it is becoming increasingly common for companies, in which all the shareholders are registered pharmacists, to conduct pharmacy businesses.
To gain an interest in a company, pharmacists can either have new shares issued to them or they can acquire shares off an existing shareholder.
One of the most fundamental aspects of ‘buying in’ to a company that pharmacists need to be aware of is that they are ‘buying in’ to all of the liabilities of the company, both past and future. If a purchase or subscription document is not drafted with satisfactory terms and comprehensive warranties, then the financial consequences for the new shareholder can be perilous.
Take the following situation:
- A pharmacist is offered to purchase 40% of shares from an existing shareholder in a company that operates a single pharmacy
- The purchase price is $750,000
- The pharmacy is trading profitably and the financials seem to stack up, although the pharmacist only completes due diligence on the accounts for the past 2 financial years
- The pharmacist completes the purchase of the shares under a basic share sale agreement with minimal warranties provided by the vendor
- The pharmacist is unaware that the company claimed a deduction in its tax return 3 years ago that is not allowable and for which it does not have a reasonably arguable position. The deduction resulted in a shortfall in tax paid of $500,000
- Six months after the purchase of the shares, the company is audited and the tax office issues the company with an amended assessment for the shortfall amount of $500,000 and penalties and interest amounting to $200,000
In this situation, the pharmacist’s shares have effectively decreased in value by 40% of the tax liability. It is certainly not out of the realm of possibilities that this could occur- in fact, scenarios such as these occur often.
Tax liabilities are just one of many liabilities that a new shareholder can effectively become liable for. Have you ever wondered what would happen if the company you just bought into was sued for negligently dispensing drugs prior to your buy in?
The good news is that the exposure of the new pharmacist shareholder can be limited if the purchase or subscription document contains appropriate terms and the vendor provides comprehensive warranties.
In the above situation, if a comprehensive tax warranty had been provided by the vendor, then the purchaser would ordinarily be able to claim against the vendor for the decrease in the value of the shares.
Now all that is left is to deal with is the remaining shareholder who is failing to pull their weight… The items that should be addressed in a shareholders agreement is a whole different ball game!
by Aaron Zoanetti – Lawyer, Pointon Parners