Tag Archive for: pharmacy purchase agreement

Secrets When Selling a Pharmacy

Competitor Calling (including chains)

If your most fierce competitor wants to buy your store, it may be a blessing or may be a curse. It really depends on your past relationship with that person. Don’t necessarily run away. Consult with the experts at COLONY RX to chart your path forward with this potential opportunity (or potential landmine).

Legacy vs. Cash

Selling to a third party compared to a family member almost always results in a higher price and better terms, but if you decide to sell to your family, I both respect and applaud you. Remember to set clear expectations about the family relationship if the business goes south, and be sure to bring in an experienced pharmacy advisor like COLONY RX to get the deal closed.

Owners vs. Employees

Former employees may be a good candidate to buy your pharmacy, but set a strict timeline. We have heard of negotiations with employees dragging on for over 5 years or more. Employee deals can take longer, but if a deal with an employee doesn’t close within 6-12 months, it is unlikely ever to close. In these cases, call COLONY RX to help get the deal closed, even if you have an ideal buyer ready.

Customer Concentration

Customer concentration is a problem. If you have one LTC home that is 40% of your pharmacy, you are going to have a problem selling it. Same if you have one doctor or clinic that is 80% of your scripts. At COLONY RX, we know how to mitigate against these factors.

Asking vs. Selling

If you heard what your friend was asking for his pharmacy and it sold, remember that his asking price was unlikely his final selling price. So don’t set false pricing expectations for your pharmacy based on someone else’s false expectations that never materialized. Additionally, every pharmacy is different, and the same buyer will pay different prices based on their needs and expectations of value. To protect yourself, trust the experts at COLONY RX to make sure you are getting top dollar.

Family on the Payroll

Non-working family members on the payroll can be counted as cash on the bottom line. Just be sure that you can prove to your potential buyer that they truly don’t work in the business or add any value to the business whatsoever. At COLONY RX, we will present your business in the best possible light to buyers, giving you the benefit of tax maximization strategies during the sale process.

Pricing Strategy

Your debts or your retirement income needs are not a buyer’s concern and should not be a significant factor when determining your pricing strategy. COLONT RX will help present your profitability in the best possible light to get you top dollar.

Growth is Good

Declining revenue or RX scripts can be a problem for buyers. Buyers like growth.  COLONY RX can help mitigate against these issues.

Landlords

Landlords can seriously complicate pharmacy sales. COLONY RX knows how to deal with landlords to make sure everyone gets what they need.

Growth Potential

COLONY RX has great expertise in pricing  “growth potential” into our deals. In other words, we can get buyers to pay for not only what the business has done in the past, but what it is likely to do in the future.

First Offer, Best Offer?

Your first offer is sometimes your best offer. You are crazy to leave a great offer on the table because of what may happen in the future. Trust the experts at COLONY RX to know if you should take the offer on the table or keep shopping.

Win-Win

The best offers must be win-win for both parties. If both parties are not happy, something is eventually going to blow up. COLONY RX has considerable expertise in structuring deals so all parties walk away happy.

Business Skeletons

Due diligence is not a time for surprises. Every business has a skeleton or two, so share any problems with your broker early. If you reveal your concerns early in the process, you will hopefully have time to resolve the issues. However, if you wait until due diligence, that small little skeleton may suddenly become frightening enough to scare your buyer away. Trust COLONY RX to present any issues you have in the best possible light and use mitigation strategies to minimize the impact.

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 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 on behalf of our sellers casts a wide net, and tries many different ways to reach people to tell them about the opportunity. 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 potential buyer. When we have this first call, we assume the buyer knows nothing so they don’t pass based on wrong assumptions. We typically have four general things to convey:

1) What type of pharmacy dare we representing? 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, we are screening the buyer. We want to know what the buyer will do with the store; what experience they have and what their financial capacity is to close.

Step II: Confidentiality Certificate

If the pharmacy buyer and Colony (on behalf of the buyer) 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. Sometimes we issue this earlier or later in the process depending on the buyer and the circumstances. It’s really a judgement call on our behalf.

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 the parties are still interested in the transaction, we ask the buyer to send an e-mail (or call us) to review key terms. We try to keep this focused on just a handful of issues: The purchase price (and terms), the key items needing further diligence and the expected timeframe to close.

Step VI: Letter of Intent

Assuming the seller and buyer agree on the general terms, we ask for 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 received an LOI from a well financed buyer will close. 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, the buyer will request more detailed documents and other diligence 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, all the paperwork is completed. The parties 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 (this formula is something we carefully negotiate). The morning after the closing date and time, any outstanding paperwork is finalized, such as populating the Asset Purchase Agreement with the final inventory amount.

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

By Colony RX

The 20 Key Sections In a Pharmacy Purchase Agreement

When you sell a pharmacy, the buyer and seller will execute a comprehensive asset purchase agreement (“APA”) which is negotiated between them. Generally speaking, the purpose of the asset purchase agreement is to document what is being purchased, what is being paid, and clarify who is responsible for what both before and after the sale.

Each pharmacy purchase agreement is different, and is worked on by the seller’s and buyer’s respective lawyers. At a very high level, here are 20 key sections in every pharmacy asset purchase agreement:

  1. Identifying the Parties: The legal name of the pharmacy seller’s corporation and pharmacy buyer’s corporation are identified.
  1. Recitals: Here, the parties state their general intent, which is that the pharmacy seller and pharmacy buyer desire to enter into an agreement to sell the assets of the pharmacy, and that the pharmacy will continue to operate as usual until the transaction is closed.
  1. Included and Excluded Assets: This section spells out which assets and liabilities are included and excluded in the pharmacy sale.
  1. Purchase Price: This section details what the purchase price is, what it is for, and how and when it will be paid.
  1. Allocation of Purchase Price: This describes how the purchase price will be allocated between the different assets.

 

  1. Inventory Value. This section describes the inventory that will be bought, and how it will be valued. For example, damaged, spoiled or expired pharmacy inventory will not be purchased.
  1. Representation and Warranties of the Seller. These are the promises the seller makes to the buyer. These include:

 

  1. The pharmacy selling the assets has the ability to sell the assets. For example, there is no court order or shareholder preventing the sale of the assets.
  2. Any contracts that the seller will assume are valid contracts.
  3. The pharmacy is not involved in any lawsuits and is operating in compliance with all laws.
  4. The seller has proper insurance in place.
  5. There is nobody who needs to give permission for the seller to sell the pharmacy.
  6. Seller has filed all required tax returns.
  7. Seller confirms all financial statements are valid.
  8. Seller confirms that nothing has changed since they showed it to the buyer.
  9. The assets of the pharmacy are in good operating condition and repair.
  10. The records of the pharmacy are true and complete.
  11. The seller has all necessary licenses and permits to operate the pharmacy.
  12. The pharmacy software is generally working and in good condition.
  13. Seller has fully and proactively disclosed all material things to the buyer.
  14. The pharmacy has conducted proper billing practices.
  15. The lease is valid.
  1. Representation and Warranties of the Buyer: These are the promises the buyer makes to the seller. Most of these are the same as what the seller promises the buyer, but there are less promises because the seller relies on fewer promises than the buyer.
  1. Covenants of Seller: These are general promises that the pharmacy will continue to operate up to the closing date as it has before the closing date.
  1. Confidentiality: These are mutual promises to keep the terms of the transaction confidential.
  1. Employees: A section that confirms that all pharmacy employees are given employee contracts.
  1. Buyers/Sellers Conditions of Closing. These are things that must happen for the transaction to close, including that all previously made promises continue to be true; All documents have been delivered; The pharmacy continues to operate as usual; and the landlord and buyer have executed a lease.
  1. A section that confirms the that the seller will help the buyer obtain licenses and contracts needed to operate the pharmacy (e.g. BOP license). In addition, it references a power of attorney that allows the buyer can use the seller’s contracts and licenses until it has its own contracts and licenses.
  1. This section sets out the terms of the seller’s non-competition and non-solicitation agreements.
  1. The indemnification section promises the buyer that they will not be responsible for issues that arose before the sale, and the seller that they will not be responsible for issues that arose after the sale.
  1. The expenses section confirms that the Buyer and seller each pay their own expenses.
  1. The severability section confirms that if one section of the agreement is invalid, the rest of the agreement is still valid.
  1. The APA is the only agreement, and this section confirms that any “side agreements” are invalid.
  1. This section confirms that the agreement may be amended only if everyone agrees in writing.
  1. Last, the exhibits and schedules contains all of the documents associated with the purchase agreement, such as a copy of the lease.

As noted above, these are only some of the terms in a standard pharmacy purchase agreement. Each transaction is different, and each pharmacy agreement is customized to the specific transaction. This is why it’s important to have a great advisor who will help you achieve the best possible result for your goals.