Legal Issues When Selling A Pharmacy

By Colony RX

 There a few legal issues that need to be considered by pharmacy owners when selling their pharmacies.

Lawyer signing papers

Finding the Right Lawyer

Candidly, the most important issue is finding a responsive lawyer. In my opinion, being responsive is the most important aspect in a lawyer. It is more important than being experienced because a responsive lawyer will quickly research and resolve questions and issues. So, when you are hiring a lawyer, it is important to feel him or her out for how responsive they will be. At a minimum, they must commit to respond to all communication within 24 business hours. If they cannot commit to this, find another lawyer.

Buying Assets and Not Shares

Substantively speaking, the first issue is that Colony RX, like virtually all buyers, purchases assets of the pharmacy, not the shares. This allows the seller to maintain their corporation (the business entity), retain certain assets which the seller does not wish to include as part of the sale, possibly defer certain taxes, and possibly use certain losses in the corporation to offset the income arising on the sale of the assets.

From the buyer’s perspective, an asset sale will shield the buyer from any liability related to when the seller owned the pharmacy. This is particularly important for any tax liability or legal liability. For example, in a share sale, if a five-year old tax issue arises, it becomes the buyers problem.

The Letter of Intent

Once the buyer and seller have verbally agreed on basic terms of the transaction, we will send a Letter of Intent for your review. A Letter of Intent is a relatively straightforward document setting out the fundamental terms of the transaction. It will specify which assets are included and excluded, the purchase price, an approximate closing date, and certain conditions of closing, such as there being no changes in the pharmacy. The letter of intent will contain confidentiality provisions to protect the buyer and seller, as well as set out the next steps in the transaction.

Generally, after a letter of intent has been signed, Colony RX will engage in a more detailed review of the pharmacy, reviewing its financial statements, operations and contracts. During this process, we will instruct our lawyers to begin preparing the asset purchase agreement to reflect the terms and conditions of the transaction.

Fundamental Terms of the Asset Purchase Agreement

The parties will enter into a more extensive purchase agreement which will contain all of the terms and conditions of the transaction. In such agreement, the seller will make promises about the pharmacy. These are statements about the status or condition of the pharmacy. For example, we will require the seller to promise that they own the pharmacy they are selling, that there are no lawsuits pending or expected, and that the pharmacy license is valid. Your lawyer will review the representations and warranties with you to ensure that they are accurate and to ensure that they are reasonable in scope.

Statutory Requirements

Your lawyer will also help ensure that you comply with all statutes that apply to the transaction. For example, sellers in some states have to file a Bulk Sales Certificate.

Searches and Consents

The buyer’s lawyer will typically perform a variety of searches against the seller’s corporation to ensure everything is in order, such as there being no outstanding lawsuits against the pharmacy. In most cases, issues that arise in searches can be easily resolved.

Third Party Consents

When selling assets, the buyer will need the consent of the landlord, as well as equipment/computer lessors, and, in some cases, key customers or suppliers. We understand that many pharmacy relationships operate on a handshake and there is no documentation between the parties. We work closely with buyers to ensure a smooth transition for everybody, and that these important relationships are protected.

Non-Competition Terms

In connection with the sale of your pharmacy, the buyer will require that the seller, and any key employees, do not directly or indirectly, compete with the pharmacy being sold to the buyer. Non-competition, non-solicitation and non-disclosure agreements will be required, but they key terms will be disclosed in the Letter of Intent.

Other Documentation

While the asset purchase agreement will be the main document for the transaction, there are other supporting documents that will be required. These are mostly standard template documents that are prepared between the lawyers to ensure the assets are transferred in conformity with state and federal law.

Legal Costs and Timing

Typically, from the time a letter of intent is signed, a transaction will take 6-8 weeks to complete. At Colony RX, our shortest transaction was 54 days and our longest transaction was several months. The key factors that determine timing are how responsive the seller’s lawyer is and how many issues arise during due diligence.

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