With increasing pressure on the market, anyone thinking of buying or selling a pharmacy business in 2016 will need to sharpen their game. Here are 10 lessons to make sure you are prepared and ready for action – by Jamie Gill, a solicitor in the pharmacy team at Ansons Solicitors.
2015 was a busy year in the pharmacy sales and purchases marketplace, with a significant increase in transactions in all areas, including small community pharmacies, independent multiples and also the large groups.
The upward trend has continued into the beginning of 2016. However, just before Christmas the government dealt a heavy blow in the sector and announced that funding for community pharmacies in 2016–17 will be cut by more than 6% (£170m). This will seemingly have a greater impact on smaller independent pharmacies and increase pressures on businesses already operating on a tight profit margin following the introduction of other various ‘efficiencies’ over the last few years.
The government also states that ‘in some parts of the country there are more pharmacies than are necessary to maintain good access’. Could this be a result of the temporary lifting of the market entry requirements for 100-hour pharmacies? This statement would suggest that in order to achieve its objectives there would need to be a reduction of the number of operating pharmacies, which may be assisted by the implementation of these proposed ‘efficiencies’ whereby smaller independent pharmacies could be put under sufficient financial pressure. We will no doubt need to wait until 2017 to see the true effects of these proposals on the market.
In the meantime, as preparation is key, we have put together 10 lessons to help you buy or sell your pharmacy business in 2016:
1. Deposit – Deposits are common in any type of transaction and are increasingly becoming the norm in pharmacy transactions. The purpose of a deposit is to offer the seller some security that the buyer is committed to the transaction and, in certain circumstances, cover the seller’s reasonable fees should the buyer withdraw for no justifiable reason. A deposit should be proportionate, reasonable and refundable in certain circumstances, for example, if a seller has misled a buyer or the seller withdraws from the sale. Before signing a deposit agreement, we recommend that a buyer has the terms of the agreement reviewed by a pharmacy specialist lawyer to ensure that they understand the risks involved and are properly advised.
2. Exclusivity – Often used in conjunction with deposits, the purpose of this is to reduce the risk of wasted professional fees and management time for a prospective buyer by giving the buyer comfort that he can incur costs in the knowledge that competing rivals have been excluded from the process. The period of exclusivity is often negotiated; a buyer requiring as long as possible and the seller wanting to keep the period concise to keep the buyer under pressure and focused on the transaction. This should be discussed at the outset and the buyer should ensure that an extension is sought if the period is likely to expire.
3. Funding – Cash buyers are uncommon and therefore buyers will often have to turn to separate funding, often a bank or specialised lender. Some of the large institutional lenders have specialist healthcare teams who deal with pharmacy transactions and buyers would be sensible to approach these. Shop around to get the best deal as lenders often have different focuses on strategy and risk. Some may have better deals for first-time buyers, others better rates for someone looking to increase their portfolio. It may pay to consider refinancing on further acquisitions.
4. NHS Regulations – There are a number of regulatory aspects to consider in any pharmacy transaction and experienced advisors will be able to advise you as to what applications or notifications will need to be made and at what point during the sale process. For example, if the NHS contract is being transferred, an application will need to be made to the relevant NHS England local area team and in a timely manner. Alternatively, you may need to notify of a new superintendent pharmacist immediately on completion.
5. Property – Property is key to a pharmacy, particularly given its relationship to the NHS contract. A lender will place particular emphasis on the importance of the property from a security point of view so it is vital to carry out thorough investigations (including searches and surveys) to ensure that there are no issues in terms of its state and repair.
6. Negotiation – A buyer and a seller will need to negotiate on a number of commercial points. It is sensible to take a pragmatic and balanced approach when negotiating a contract. Points scoring or trying to win every argument can distract clients from what is really important, delay the deal and ultimately increase your costs. Specialist advisors will also be well placed to advise you on the key commercial points and how best to protect yourself.
7. Employees – Employees are the heart of any business and it is an area that should be handled with care by both a buyer and a seller. Employees are protected by the Transfer of Undertakings (Protection of Employment) Regulations. Sellers are advised not to agree to any changes to their employees as part of negotiations without speaking to a solicitor first. Equally, buyers should not assume that they can walk into a new business and dismiss employees or change their terms of employment. Failure to comply with employment law can lead to significant claims by the employees against both the seller and the buyer
8.Data protection –Data protection is currently subject to great scrutiny. A pharmacy, by its very nature, has access to extremely sensitive information about patients and also its employees. It is therefore essential that businesses are aware of their obligations under the law and are registered with the Information Commissioner’s Office (ICO) where appropriate. We have come across a number of businesses that are not aware of and not in compliance with their data protection obligations, which, in certain circumstances, can lead to criminal prosecutions and significant fines.
9. Due diligence – A prudent buyer should carry out thorough due diligence into all aspects of a business including finance, tax, employees, contracts, complaints and suppliers. A seller should be prepared to provide as much information as possible and needs to be well organised for this. A seller can prolong a transaction by not providing full information when requested, which can also make a buyer wary. Preparation is key here and keeping an organised record of all contracts and paperwork is a simple but effective way of achieving this.
10. Advisors – When looking to acquire or dispose of your pharmacy it is best to use advisors with specialist knowledge in the sector. There are a number of highly experienced sales agents, accountants and solicitors who specialise in the pharmacy market and will be able to give you the specialist advice that you require, whether buying or selling. This will enable you to obtain the maximum value for your business and will hopefully save you time and, more importantly, money and make for a smoother process.
Ansons Solicitors have developed an expertise in the pharmacy sector with a team of specialist pharmacy solicitors who understand the particular needs of the industry and appreciate the specific requirements of a pharmacy business. During 2015 Ansons Solicitors were involved in more than 30 separate pharmacy transactions with an aggregate value of over £32 million. We also have a network of close professional contacts within the pharmacy sector, which includes a range of trusted advisors who can help with pharmacy regulation and pharmacy finance. Contact Jamie Gill on 01543 431185 or firstname.lastname@example.org for further information and to request a copy of our pharmacy brochure.