PURCHASING A PHARMACY A complete guide to the steps required in identifying, bidding, purchasing, financing and finally owning a Pharmacy.
Introduction For those people with a desire to purchase a pharmacy it is useful to have an appreciation of the various steps involved. It is further important to appreciate that the process can be a difficult, long and frustrating one. We urge all of our clients to exercise patience as the proper examination of any opportunity will lead to a far better result than that achieved when impulsive or desperate action is undertaken. It is important to realise that the purchase of a pharmacy may well represent the most significant asset purchase of your life and further to this the most significant borrowing of funds. In relation to the borrowing of funds it is crucial that appropriate respect is paid to the obligations that accrue from borrowing large amounts of money and in this regard the careful following of the steps for purchase and proper assessment of the opportunity is crucial. Process Overview Contact JPH Group Complete free financial assessment with JPH Group Review pharmacy profiles & make an offer Negotiate with pharmacy brokers JPH Group Solicitor You Complete settlement with appropriate adjustments Set up EFTPOS and banking facilities Organise and attend stocktake Sign heads of agreement / Review contract Notify the Victorian Pharmacy Authority & Medicare Complete due diligence Liaison with landlord & bank Re: new lease & transfer business name Obtain finance approvals Sign contract / go unconditional Set up required level of insurance Order ABN & TFN
STEPS IN PURCHASING 1. Identifying Opportunities Opportunities for pharmacy purchase can arise in a number of ways, however the most likely is that a personal decision to acquire a business is made and pharmacy brokers are approached to identify what opportunities exist in the market at that particular point in time. In our experience this can be a frustrating process as at any point in time, demand exceeds supply and we reiterate our advice that patience is a necessity. It is further important to identify the sort of business opportunity that you are looking for and to identify the financial bands in which you are going to seek a pharmacy purchase. Our firm has access to all available pharmacy businesses that are on the market from all of the major pharmacy brokers. Should you be interested in assessing any of these opportunities please feel free to contact us. In our experience it is useful to advise the broker that you have an experienced pharmacy accountant and this will provide them confidence that you have the financial and professional ability to undertake a purchase. 2. Reviewing Business Opportunities At some point in time you will be successful in relation to identifying a business opportunity and you will find that brokers in all cases will have a document available for your perusal which is generally entitled pharmacy profile (see attached for example). well form the basis of a preferred price at which to undertake negotiations. This will be undertaken by your accountant. In identifying the purchaser s perceived value of the business the accountant should take into account factors such as location, wages percentage, rent percentage, current return on investment in the marketplace and comparable sales in the marketplace. This calculation can then form the basis of a price point for your negotiations. 3. Negotiation of Price Having identified a perceived value range of the business opportunity the pharmacy accountants and the client at this point in time work closely together with in most cases the pharmacy accountant negotiating with the broker to achieve a price result with respect to the business. Given that the pharmacy accountants have dealt with the brokers on many occasions before it generally transpires that a far better negotiated position can be achieved when conducted by the pharmacy accountant as agent for the prospective purchaser. Quite obviously, a large amount of backward and forward negotiation will take place during this process with the opening offer to purchase being substantially lower generally than that sought by the vendor. As in any negotiations the intent is to meet a middle ground that is satisfactory from both parties point of view. This process generally takes between 48 hours and a week depending upon the nature, scale and complexity of the business situation. In the pharmacy profile all relevant financial information should be provided including income and expenditure details for the last 2 3 years for the business, details of the lease, details of wages and script analysis reports. Other information may also be included including the broker s calculation of opinion of value and most importantly the desired purchase price sought by the vendor. Should the pharmacy be of some interest to you and fit within your financial capabilities it is crucial that the opportunity be reviewed in a technical manner with experienced pharmacy accountants. At this point in time, a valuation can be effected of the business based on information provided and this may
4. Formalities Upon Purchase Having reached a successful negotiation process and identified a price at which both vendor and purchaser are happy the formalities of the process commence. With your accountant, who should be totally experienced in the pharmacy arena, it is our strongest advice that you engage a lawyer who also has strong and detailed experience in the pharmacy space. Whilst the transaction of a pharmacy purchase is in itself not overly complicated there are peculiarities that do exist that can cause enormous difficulties for practitioners not experienced in this area. It is our advice that you only deal with experienced and competent lawyers in the pharmacy area and we are available at any time to offer up to six different parties for your consideration. Having appointed your own pharmacy lawyer he will liaise with the broker and the vendor s lawyer with respect to all the paperwork requirements to bind your purchase of the business. Generally speaking, a Heads of Agreement will be prepared which is a legally binding document and outlines the terms and conditions of the purchase. Both parties will sign this document and this will form the basis of a completed contract. You should under no circumstances sign any documentation prior to your lawyer having provided detailed advice so that you fully understand the implications of what you are signing. Your lawyer will also be responsible for liaison with the broker in relation to transfer of approval number and transfer of lease and other associated legal aspects of the sale. You will also be required to pay a deposit at this stage, usually 10% of purchase price but negotiable. Please also find attached a pharmacy flow chart. 5. Completion of Due Diligence As part of the contract two important and crucial clauses will be inserted to provide protection to the purchaser. The first is a satisfactory conduct of due diligence ie. due diligence examination. Due diligence examination is not an audit but rather a review of source documentation to identify that information provided to you by the broker in the pharmacy profile is capable of substantiation. As part of this process your pharmacy accountant will obtain all relevant source documentation including supplier invoices, wages records, details of lease, bank statements, income and expenditure details, day book records, list of top 20 customers, doctors list and any other relevant information. These records will be reviewed to identify that within reasonable statistical boundaries they accord with the information that has been provided to you. Should the due diligence be deemed to be in order this special condition is satisfied with respect to the purchase. Should it not be in order the purchaser has the option of either walking away from the deal and obtaining a full refund of deposit or further, in the alternative, to renegotiate his position in light of the new information. Obviously, should concerns be raised, the vendor will be given an opportunity to explain the variations as detected and in some cases these may be quite reasonable and no alteration to position is required. You should under no circumstances sign any documentation prior to your lawyer having provided detailed advice so that you fully understand the implications of what you are signing
STEPS IN PURCHASING 6. Obtaining of Finance The second relevant condition that will exist in your Contract of Sale is what we call a finance clause. This clause provides a timeframe by which the purchaser has to have obtained his financial requirements for the business from a lending institution. Quite obviously, if finance cannot be obtained the purchaser is not in a position to settle the business and the deal will be at an end with a full refund of deposit. Your pharmacy accountant should be involved in a detailed manner in this process with respect to sourcing the best options available in the marketplace. It is important to appreciate that bank finance for pharmacies is a varied situation with banks at various times having an appetite for pharmacy lending or alternatively not wishing to participate. The amount that each bank will lend on a particular business will vary and again in our advice it is best if a number of applications to varying institutions are made. It will be necessary as part of the application process to provide all personal details including assets and liabilities statements along with cashflow projections for the business and a number of other relevant items. Once packaged these are presented with a business plan and proposal to relevant banks with advice to them as to the timeframes we have to work with. 8. Purchaser s Duties After the purchase has become unconditional whereby all conditions in the contract have been satisfied the purchaser will be responsible for arranging meetings with wholesalers to identify his preferred carrier and if required various banner groups. At this point in time very little of a formal nature is required on the part of the purchaser as in the background all matters with respect to the transfer of the business are being attended to by the lawyer including arranging a transfer of lease and any requirements for lending that the banks might have. An important point to consider at this stage is that having selected a bank the purchaser should also arrange for EFTPOS to made available on the commencement date of the business. 7. Valuation As part of the of the finance requirements of the pharmacy purchase, a pharmacy valuation must be conducted prior to approval for lending. The Pharmacy valuation can only be conducted via an approved pharmacy valuer who is listed on the panel of the bank which you are applying for finance with. Should you employ our firm to act on your behalf as accountants, we are precluded from conducting the valuation as there would be a conflict of interest. It must be understood that this valuation is the critical component of the finance lending for the pharmacy purchase. The bank will lend a percentage of funds based on the valuation not on the purchase price. Given the inherent demand for pharmacy businesses and the lack of supply in the market place, often a premium will be paid for a business. Therefore, potential buyers must make allowances to fund any shortfall which exists between the valuation of the business and the purchase price paid for the business.
9. Organising Settlement In conjunction with your lawyer the appropriate settlement date will be established and generally set as part of the contract. Prior to settlement a stocktake will need to be arranged and it is crucial that the purchaser attend the stocktake. The stocktake rules will be embraced in the Contract of Purchase and these should be adhered to thoroughly and the purchaser should be diligent at the stocktaking process to ensure that out of date or redundant stock is not part of the purchase situation. As advised, all EFTPOS facilities should be in place prior to this date. 10. Execution of Paperwork In the weeks leading up to settlement a large amount of paperwork will require execution on the part of the purchaser. These documents will generally be in relation to the finance that has been obtained, however your solicitor will also require your attention with regards to matters associated with the lease and various compliance matters with the Pharmacy Board, Medicare etc. It is our advice that in the two weeks prior to scheduled settlement that the purchaser is available as often high levels of pressure exist as settlement time approaches. 11. Take Over Date Having satisfied all matters your solicitor will attend settlement on your behalf along with the banks providing you finance and you will be in a position to take over the business on the designated morning. As part of the special conditions in the contract you will generally have up to a week s handover assistance provided by the vendor and this should be utilised thoroughly to familiarise yourself with any peculiarities that exist within the business that may not have originally been evident. At this point your senior shop person will also be crucial in terms of introduction to customers and whilst it appears to be an overwhelming situation at this stage, things generally settle down quickly. with respect to your bookkeeping and compliance obligations. The proper attendance to these including things like payment of compulsory superannuation and remittance of PAYG Withholding can make a significant difference to the amount of GST refund that you obtain and generally make your life significantly easier and enable you to focus on business operations. 12. Costs The process of purchasing a pharmacy has a number of costs associated with it and in general terms these are described below: a) Legal expenses - approximately $7,000 - $10,000 b) First month s rent c) Finance application fees - approximately $2,000 - $5,000 depending upon amount of borrowing. d) Accountants expenses approximately $2,500 embracing all aspects from identifying opportunities, on going meetings, answering all queries and questions from the start of the process until settlement date. e) Valuation a pharmacy valuation will be required by your lending institution and the cost of this is approximately $2,800. f) Sundry allow $2,000 - $5,000 depending upon the size of the business. At this point in time, a number of compliance matters will be new to you including the payment of wages to staff and completion of Business Activity Statements. As part of the compliance requirements, your pharmacy accountant would have registered you for GST and again, in these initial stages, it is our strongest advice that professional assistance be obtained
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