Business Overdrafts
Be financially flexible with a business overdraft.
Buying or selling a pharmacy
Read time: 5 mins Added: 20/02/2023
Whether you’re an experienced operator or a first-time buyer, it is critical to be clear on how to structure a purchase at the outset of any acquisition. If the pharmacy is owned by a company, there are two choices: buy the assets of the pharmacy business or buy the company itself by acquiring the shares.
The structure is likely to be a point of negotiation between the buyer and seller, who will often have different views and objectives. In this article, we look at some of the key differences to consider and the factors which influence this choice.
The pharmacy market has issues unique to it, so any prospective buyer or seller should take advice from advisers experienced in the sector.
Types of purchase defined
Asset purchase
This is where the buyer acquires all the business and assets of the pharmacy. The assets are transferred or assigned to the buyer, including:
- Stock
- Goodwill
- Equipment/IT systems
- NHS Contract
- Employees
Any liabilities of the seller are generally excluded from the transfer.
Share sale
In this type of purchase, the buyer acquires the shares of the company which operates the pharmacy and effectively steps into the shoes of the selling shareholders. The underlying ownership changes but the company continues to hold all assets and liabilities. The buyer therefore effectively inherits all the company’s historic liabilities and activities.
On some transactions, there will not be a choice. For example, if one pharmacy from a company that operates many pharmacies is being sold, an asset sale may be the only option.
Sellers often prefer a share sale as the tax treatment on the sale is usually more favourable for them. However, a buyer may prefer an asset purchase as it’s more straight forward and presents less overall risk to them.
Factors to consider when buying or selling a pharmacy
NHS Contract
This is often a key determining factor in the structure of a pharmacy purchase. Under NHS legislation, all pharmacies must hold an NHS Contract, which is the right for the pharmacy to be registered on the NHS England pharmaceutical list.
If a buyer purchases the assets of a pharmacy business, the NHS Contract must be transferred to them. This involves an application to NHS England. If the buyer is not already registered on the pharmaceutical list for an existing pharmacy, they must also submit a “fitness to practice” application. This applies to all first-time buyers and also corporate buyers if the pharmacy is to be acquired by a new subsidiary.
Once the fitness to practice application has been processed, the NHS will consider giving consent to transferring the pharmacy’s NHS Contract. If approved, there is a period to allow for any appeals before the buyer can complete the purchase.
The process of getting consent and providing the necessary notices takes a minimum of 3 months if no fitness to practice application is required, but it typically takes longer. So, it’s vital that this process starts at the outset and appropriate documentation is put in place by legal advisers with experience in pharmacy transactions.
On a share sale, no transfer of the NHS Contract is required – it remains in place in the name of the company – so the parties don’t need to get consent from the NHS before completion. The buyer will need to notify the NHS of any changes to the superintendent pharmacist and its directors, but that can be done on completion and doesn’t require any advance approval.
As a share purchase does not need NHS consent before completion, it is often quicker to complete – which is not generally the case for share sales in other sectors.
On all transactions, the General Pharmaceutical Council (GPhC) has to be notified of the change of control, but this can be done on or shortly after completion so shouldn’t affect the overall timescale.
Property
The property from which the pharmacy trades is an essential part of the business. On an asset purchase, the property will need to be transferred to the buyer. If the property is leasehold, the landlord’s consent to the assignment of the lease will be needed. On a share sale, the lease will remain in the name of the company and no transfer will be required. This should also be factored in to the timing of the sale.
It’s likely that the bank will require a minimum term remaining on the lease for funding purposes. This should be checked early in the process and steps taken to extend the lease if necessary.
Documentation
The legal process of acquiring a pharmacy requires a purchase contract to be prepared and negotiated. Purchase contracts for share purchases are more complicated, as additional protections need to be negotiated for the buyer because of the increased risk to them. An asset purchase agreement is much more straightforward.
The overall transaction documents are also more complicated on a share purchase as the buyer needs to deal with changes to directors, share transfers and other arrangements.
Due diligence
The buyer needs to carry out a process of due diligence to review and check all aspects of the target pharmacy, both legal and financial. The aim is to identify any issues in the business or any matters which may affect the valuation of the pharmacy pre-completion. The bank will also instruct valuers to carry out a valuation of the business and the property.
Generally speaking, the due diligence process on a share sale is more in-depth than on an asset purchase. As the buyer acquires the company, including all liabilities and historic issues, a more detailed review is needed to make sure there are no “skeletons in the cupboard”.
It is essential that both the due diligence process and the transaction generally are carried out by advisers who are familiar with pharmacy businesses and have experience of pharmacy transactions so they can identify any relevant issues.
Adrian Dye is a partner in Sintons LLP’s dedicated healthcare team. Adrian is a specialist lawyer with over 15 years’ experience advising clients in the pharmacy sector. The Sintons healthcare team is nationally recognised for its expertise in the wider healthcare sector advising healthcare professionals, businesses and organisations. The team of dedicated lawyers can support pharmacists and pharmacy owners on a range of issues including regulatory, property and employment.