So, You Want to Buy a Pharmacy? (Part Two)

This is the second of a two-part series where we outline some of the essential points buyers need to know before purchasing a pharmacy. Read part one.

After a series of negotiations with the seller, you have finalized and signed a letter of intent and have started undertaking the necessary due diligence investigations to evaluate the pharmacy’s business, confirm assets and liabilities and identify any potential risks.

Now what? The lawyers for each party will begin drafting and negotiating the definitive purchase agreement setting out the representations, warranties and conditions that each party must fulfil to complete the transaction.

Once the definitive agreement is underway, your lawyer should consult with you regarding additional agreements and documents to be delivered at the time of closing, which may include employment or consulting agreements; non-competition, non-solicitation and confidentiality agreements; lease agreements and others.

Definitive Purchase Agreement

The purchase of the pharmacy will be carried out by way of either a share purchase agreement or an asset purchase agreement. The structure of the transaction should be discussed with your lawyer prior to negotiating the letter of intent and will ultimately be determined based on tax planning considerations and the results of your due diligence.

The definitive agreement will reiterate and elaborate on the fundamental terms from the letter of intent, including, among others, the financial terms respecting the purchase price, the form of payment (e.g., cash, shares, promissory note or a combination thereof), any portion of the purchase price to be held in escrow as a holdback amount to cover post-closing indemnification claims and other specified contingencies, any purchase price adjustments based on deficiencies or surpluses in working capital and/or inventory, and any earnout provisions that make certain portions of the purchase price contingent upon the acquired company reaching certain milestones during a specified period after closing.

The definitive agreement should stipulate certain conditions precedent for your benefit, including, among others, completion of due diligence investigations to your satisfaction, financing being arranged on satisfactory terms, receipt of any necessary third-party approvals (e.g., landlord consent for a lease assignment or a change of control of its tenant following a share purchase, key supplier consents under applicable banner agreements for chain pharmacies, etc.) and an inventory count to be conducted by representatives of the buyer and seller immediately prior to the closing of the transaction.

The representations, warranties and covenants to be included in the definitive agreement are crucial items for legal counsel to negotiate, as they are the promises that the parties provide to one another as an inducement to enter into the definitive agreement and complete the transaction. These typically include, among others, representations that any corporate seller has been duly incorporated and organized and has all necessary power and authority to own its assets, to carry on the business and to enter into and perform its obligations under the definitive agreement; that each seller has title to the shares or assets being sold; that the books, records and financial statements of the pharmacy are true and complete in all material respects and fairly present the financial condition of the business; that the assets of the pharmacy are in good working order; that inventory is in good and merchantable condition; that all applicable taxes have been paid up to the closing date; and that the business has been conducted in compliance with all applicable laws.

The representations and warranties included in the definitive agreement should be drafted in consideration of the results of the due diligence performed by the buyer and the buyer’s advisers and should be based on the nature of any potential liabilities being acquired as part of the transaction (e.g. liabilities respecting employees, liabilities under material contracts, liabilities under work orders from governmental authorities, etc.). If any concerns arise during the course of your due diligence review, you should discuss these matters with your professional advisers to ensure that your interests are protected against any issues that may be discovered following the closing of the transaction.

Employment and Consulting Agreements

As a new owner, it is important to maintain continuity with the clients of the pharmacy and grow your business. One mechanism to do so is through retaining current staff of the business to build on their current relationships with clients. By working alongside existing staff, you can foster new relationships of your own. As part of retaining current pharmacists, pharmacy technicians and general clerks, employment agreements should be prepared. In instances where a pharmacist is involved in managing the business or provides his or her services through a professional corporation as an independent contractor, a consulting agreement might be appropriate instead.

Any employment or consulting agreements should be discussed with your lawyer to ensure that your interests are protected and that the terms of the agreement are in compliance with applicable employment laws.

Non-Competition, Non-Solicitation and Confidentiality Agreements

In order to protect the interests and bottom line of your pharmacy, sellers should enter into formal agreements not to compete against the pharmacy. As a buyer, a portion of the purchase price relates to the purchase of the goodwill and the client and supplier relationships of the existing pharmacy. The restrictive covenants contained in a non-competition, non-solicitation and confidentiality agreement provide assurance that the sellers will not use their knowledge of confidential information or existing relationships to undermine the commercial potential of the business you have purchased. Your advisers should discuss the possible mechanisms to put in place in order to prevent a seller party from seeking employment with, or opening or investing in, a competitive business in the vicinity of the purchased pharmacy.

The sellers should be restricted from soliciting the employees, clients and suppliers that maintain current relationships with the pharmacy. Depending on the location of the potential pharmacy, the radius of the area surrounding the pharmacy in which the sellers will be restricted from competing against the business and the length of the term during which they will be subject to that restriction should be discussed with your lawyer to ensure that the restrictions imposed upon the sellers are reasonable and enforceable.

Real Estate

There may be an opportunity to purchase the land and building where the pharmacy operates. Your advisers should be consulted to determine the best course of action based on the structure of the transaction.

If you elect to purchase the property, additional due diligence should be performed to ensure the property is in good standing. Your lawyer will conduct additional searches to confirm items such as registrations against title, outstanding realty taxes, environmental compliance, payment of utility accounts and compliance with municipal and provincial bylaws, zoning requirements and work orders.

If the seller is retaining the property, often a new lease will be negotiated to commence following the closing of the transaction.

Note: The items contained within this article are not an exhaustive list of provisions to be negotiated with a potential transaction. An extensive list of items should be discussed with your advisers when structuring any transaction. This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.

This article first appeared in Communication Journal, a publication of Pharmacists Manitoba.