Inside the Pharmacy Sale Process

By Colony RX

Inside the Pharmacy Sale Process

What does a pharmacy purchase look like, from start to finish?

In this post, I will describe the primary steps in selling and buying a pharmacy.

Step I: Sourcing

Before a buyer ever talks to a seller, before a deal even gets off the ground, the buyer and seller need to find each other. This is what we call sourcing.

During the sourcing stage, the primary player is the buyer. The pharmacy buyer is combing the landscape, sifting for pharmacies that have good traits, researching them, weighing risks and benefits, and using this information to decide which pharmacies to contact.

In this stage, ColonyRX casts a wide net, and tries many different ways to reach people. We still find the best way is word of mouth, where we get a referral to a potential seller with someone who knows our stellar reputation in the pharmacy community.

Step II: Screening

The screening stage consists of a very high-level conversation with the pharmacy seller. When we have this first call, the pharmacy seller should assume we know nothing about the store, because this is usually true. We typically have four general questions:

1) What type of pharmacy do you own? For example, do you own a traditional retail pharmacy or a specialty pharmacy or a closed-door LTC pharmacy. In this question, we want to know where your scripts come from and what kind of scripts you dispense.

2) Where is it located? What kind of community are you in? What kind of building are you in?

3) What is your top-line revenue (gross sales)?

At the same time, sellers want to screen us. They want to know what we will do with the store (we will run it as the seller did); They want to know what will happen to their staff (they will all have guaranteed employment); They want to know who we are and why we are buying pharmacies (see our website at www.colonyrx.com for a lot of information on this).

Step III: Confidentiality Certificate

If the pharmacy seller and Colony decides to move forward, we will send a confidentiality certificate, also known as a non-disclosure agreement (“NDA”). In short, the NDA is a legal document that protects any confidential information about the business shared by the seller. For more information on this, see our blog post about Confidentiality.

Step IV: Due Diligence

A signed NDA kicks off the first round of due diligence (“DD”). Put simply, due diligence is the investigation of a pharmacy. In the first due diligence stage, we will ask for recent tax returns and/or financial statements. It should not take more than 10 minutes to get these documents from your bookkeeper or accountant.

Once we have this information, we will often have a more detailed phone discussion about the:

  • Pharmacy Operating history
  • Script mix
  • Real estate/physical location
  • Staff
  • What the seller wants to do after the sale
  • Growth opportunities

The diligence process is a two-way conversation. The primary goal of diligence is to provide a general picture of the pharmacy, communicate risks, and answer any questions.

Step V: Indication of Interest

After a cursory round of diligence, if Colony is still interested in the transaction, we will have a phone call with the seller to discuss the very high-level terms of a potential purchase. We try to keep this call focused on just a handful of issues: The purchase price, the key items needing further diligence and the expected timeframe to close.

After this this phone call, the seller can decide to either accept or decline Colony RX’s offer. For a variety of reasons, we don’t negotiate at this stage. We put our best offer forward and that is our offer. As such, there is no pressure on the seller to “perform” on the call or even give an answer on the call. They are welcome to think about it and get back to us. If the buyer is interested in proceeding, we will move the Letter of Intent.

Step VI: Letter of Intent

Assuming the seller and buyer agree on the general terms, Colony RX will send a comprehensive Letter of Intent (“LOI”).

The LOI is an agreement that discloses the most important terms of a transaction. Please see our other post called “The Letter of Intent” for more details. For the purpose of this post, the LOI will usually include:

  • Details on the pharmacy sale price and how it will be paid.
  • Any assets that are excluded from the transaction.
  • Estimate of closing date.
  • List of tasks that need to be completed by closing.
  • Period of exclusivity where the seller agreed to only deal with the buyer.
  • Any additional areas of due diligence required by the buyer.

The LOI is, in our view, the most important milestone in the successful sale of a company. This is because, to date, virtually 100% of deals for which Colony RX has signed an LOI has resulted in a purchase and sale of the pharmacy. If the buyer and seller can get past this stage, in all probability the deal will close. The next steps, while necessary, are largely a formality.

Step VII: More Due Diligence

Once the LOI is signed, Colony will request more detailed documents from the pharmacy, and arrange an onsite visit to view the premises and meet the seller in person.

Step VIII: Finalizing The Asset Purchase Agreement

In this step, things are turned over the lawyers to complete all the paperwork. The parties and their lawyers will complete a comprehensive asset purchase agreement, finalize things involving the landlord and employees, and get the pharmacy transaction right to the finish line, except for the inventory count. In this stage, things tend to be simplified because all of the key business terms are disclosed upfront in the LOI.

Step IX: The Closing and Transition

On the evening before the closing time, the inventory of the pharmacy will be taken by a third-party company. The company is hired jointly by the seller and buyer to ensure the inventory count is accurate. The price of the inventory is based on the seller’s acquisition cost, net of rebates and discounts. The morning after the closing date and time, the lawyers will finalize any outstanding paperwork, such as populating the Asset Purchase Agreement with the final inventory amount. That morning, the pharmacy opens under new ownership for the first time.

Step X: Residual Transfer Issues

Once the transaction is complete, there is still some work to be done in credentialing the pharmacy with new third-party contracts, transferring different account from the owner to the seller, reconciling accounts, etc. The vast majority of the work at this point falls on the buyer.

This overview is only general. However, At Colony RX, we feel running a very structured process is necessary to completing a transaction with minimum frustration. The reason is that by following a structured process, we are sure to catch and address issues early, avoiding expensive and time consuming negotiation of issues later in the deal process.

Image: wavebreakmediamicro / 123RF Stock Photo

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