In the first of two parts starting this month, Umesh Modi looks at the processes of buying a pharmacy …..
Buying a Pharmacy
Buying a pharmacy business is not just about buying premises but it has an endless and stressful list of things to assess, such as, the risks and rewards.
You should register with pharmacy transfer agents with repute. They will pass on to you all relevant information meeting your investment needs.
Choosing the right professionals, such as specialist accountants and solicitors in buying of pharmacy business is vital to ensure that the purchase proceeds smoothly, quickly and cost effectively.
Offer to purchase
Own funds, external loans, etc. are requisites to finance the purchase, primarily the goodwill and stock at valuation. What a particular pharmacy business is worth to you and matters to consider are:
- location & potential
- market base & competition
- location of GP surgeries
- split of NHS and OTC income
- wholesale, on-line and services income
- rent, rates and staffing costs
You need to identify and weigh up the threats and opportunities in the vicinity. There may be a need to negotiate a reduced price.
Beware of sellers’ misleading representations and statements. Do not just assume that business accounts and information supplied is the whole truth. You should seek independent examination of the accounts and tax position – known as the financial due diligence. Circumstances may prompt you to stop, think and question your investment decision at any time before signing the purchase agreement. Are the business prospects to your expectations? Are the efforts, risks and stress worthwhile for the expected rewards?
1 Share Purchase
If the business for sale is operated through a company, then you will most likely acquire the entire share capital of the company (target).
If you buy the company, you essentially take over the pharmacy operating through that company, with all its assets and liabilities (including all the past liabilities). It is therefore crucial to undertake a thorough legal and financial due diligence.
Advantages of a share purchase:
- Continuity of business – it is business as usual.
- No NHS delays – there is no need for change of ownership, when the target company is to remain operational. However, it will require a change in ownership if a hive-up is planned.
- Formation or addition to a “Group” – it will confer tax advantages including the ability to set off losses within the group, and to pay gross interest, intra-group.
- Title to premises – automatically passes on, except when future hive-up is in the pipeline.
- Contractual rights – automatic transfer (subject to restrictive practices, if any).
Disadvantages of a share purchase:
- The buyer cannot cherry-pick the assets and liabilities they can take over. Everything is passed over under the Share Purchase Agreement.
- No tax relief is available on the goodwill.
2 Asset purchase
This is when you purchase the goodwill of the business (including premises, NHS contract and staff). The due diligence is less onerous and generally the transaction is much more straight-forward.
Advantages of an asset purchase:
- None of the other assets or existing liabilities are taken over.
- Potential tax relief on the purchased goodwill.
Disadvantages of an asset purchase:
- Consent will be required from the landlord for the property to be assigned, subject to SDLT. It can be costly and time-consuming.
- Business contracts will need to be specifically assigned to the buyer, requiring consent of third parties.
- NHS contract will be subject to a change of ownership, prior to completion.
The choice between the two alternatives depends on the commercial and tax considerations for both the buyer and seller and striking a balance between their respective interests.
To conclude, also ensure that all necessary warranties and indemnities are included in your purchase agreement, for maximum legal coverage. Agree on time scales for the purchase and plan an efficient approach. An agreement in principle will consists of “head of terms” which should be vetted by a solicitor.
In the next month’s article, I will cover more on financing and due diligence.
This article does not constitute legal and/or financial advice and is for guidance only. Specific professional advice should be taken before acting on matters mentioned here. Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene LLP. He can be contacted on 020 7383 3200 or by email on email@example.com