Picture this: you’ve been thinking of buying a pharmacy, and an opportunity to purchase one has just presented itself. It seems like a dream come true—why start your own pharmacy from the ground up when you can buy an established one?
Before moving ahead, you’ll need to consider a number of important steps, from negotiating the purchase price, considering the purchase structure (asset or share purchase), through to the closing transaction. It’s also important to note that, as a buyer, depending on the structure of the transaction, you might be assuming contractual obligations and liabilities of the pharmacy you’re purchasing, so you’ll want to know exactly what those are before finalizing a deal.
So, where do you start? When considering purchasing a pharmacy, we recommend the following working group: your lawyer, your accountant and your financial adviser. Once a working group is in place, you’ll be able to move to the next step in the process: drafting a letter of intent.
Letter of Intent
Typically, you’ll have already discussed the basic terms of buying a business with the seller before you have a meeting with your lawyer. But you’ll want to exercise caution during informal conversations about the deal, purchase price or otherwise, because the actual framework for the transaction will be formally set out in a letter of intent (“LOI”) between you and the seller.
You’ll either be purchasing the assets of a business or the shares of a business. When you’re negotiating terms of the sale, you should have your accountant ensure that the purchase price you’re agreeing to represents a fair value of the business. As you negotiate with the seller, the terms you agree to in principle should be included as definitive provisions in the letter of intent—and described in as much detail as possible—in the purchase agreement.
Items you should consider incorporating into an LOI include, but are not limited to, a purchase price, working capital adjustments, non-competition and non-solicitation agreements, any employment agreements or transition services agreements with the seller, and a confidentiality requirement that binds each of the parties.
As the buyer, you may also want to include an exclusivity clause in the LOI. This would prevent the seller from soliciting third-party offers for the business, and require him or her to negotiate exclusively with you for an agreed-to period of time.
As you negotiate the LOI, you should consider how you want to acquire the business you’re targeting—that is, who is the buyer entity?
You could purchase the business personally, through a corporation or through a partnership. If you have multiple shareholders in your corporation, we recommend agreeing to a unanimous shareholders agreement to govern the decision-making and operating requirements of your corporation. Alternatively, if you are entering into a partnership with another person for the purchase of this pharmacy, we recommend agreeing to a partnership agreement to govern the decision-making and operating requirements of your partnership.
Why a corporation or why a partnership? There are different advantages to owning a business through a corporation or a partnership. However, to determine if this is the right strategy for you, you should talk to your accountant and lawyer to ensure the right business and tax planning measures are being considered for your particular needs.
Notwithstanding the foregoing, you don’t have to decide on a buyer entity before drafting the LOI—it’s common to include language in an LOI that allows you to nominate another purchasing entity.
Due Diligence Period
Your LOI will include provisions for what is known as a due diligence period, which will come into effect shortly after the LOI is executed. One of the first items to consider is the period of the due diligence period, which can vary depending on the transaction and the terms you negotiate.
At this time, the seller will give you and your advisers various documents pertaining to business operations. These will include corporate records, contracts, employment agreements and financial statements.
Use the due diligence period to familiarize yourself with the business’s operations and ongoing commitments. Your lawyer can assist you with the due diligence investigation, as there will be certain obligations and liabilities you’ll assume once the transaction closes. You don’t want to have any unwelcome surprises down the road, so the due diligence period is extremely important. Items of consideration include: regulatory violations, company liabilities, and compliance with Canada Revenue Agency, the Workers’ Compensation Board and other governmental departments.
If you are purchasing the shares of the pharmacy, you will want to review the financial statements with your accountants, and review the minute book with your lawyer.
Additionally, you should pay specific attention to the requirements outlined in contracts the pharmacy has entered into, including requirements for consent, which may be found in supplier or lease agreements, and rights of first refusal, which are typically found in a pharmacy supplier’s banner agreement. Due diligence investigations could delay—or put a stop to—the closing of the transaction.
This is the first of a two-part series where we’ll outline some of the essential points buyers need to know before purchasing a pharmacy.