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Take stock - In the contract

What’s in the pharmacy contract?

There are many variations when it comes to contracts of sale.

Special conditions include clauses that support the understanding and treatment of the following areas;

  • Total Value
  • Stock
  • Employees
  • Restriction of trade
  • Treatment of Debtors
  • Leased equipment
  • Lease of premises

The total value of a pharmacy business is the combination of the Goodwill, Stock at valuation and the fixtures and fittings. However it is how it is interpreted into a contract that can make a difference.

Some contracts read that if the stock is more than expected then the difference comes off Goodwill. This way the overall price does not change. It also means the Vendor may not have known his stock level and in turn can develop other questions around the Gross Profit performance of the business. Another method at arriving at the price is to say that Goodwill and fixtures and fittings are a fixed amount and stock is the variable amount. A buyer can limit the amount of stock she/he is prepared to take in the sale. This therefore adds another level of complexity if the Vendor has nowhere to take the unwanted stock. The point is that unless the Vendor has a reasonably good handle on the value of the stock the buyer may need extra funds when it comes time to settle the deal.

When it comes to stock in the contact, and for example the estimated value of the stock is say $200,000, however the stock valuation comes in at $220,000 the best way to handle this situation is to have an agreed stock level and an absolute maximum stock level. The agreed stock level is the $200,000 and that is paid partly at settlement and then usually the balance is around 15 days later once both parties have had time to look over the stock items and values. The Absolute maximum value of stock is for when or if the stock value is higher than the $200,000 but cannot be higher than an agreed amount of say $240,000.  Therefore in this case the stock value is $20,000 higher than expected and this amount is usually paid to the vendor 2 or 3 months after settlement. This way the purchaser has time to work through the stock level and convert stock into cash to pay the balance. If the stock value was under the agreed amount of $200,000 then that is all that is paid. The Vendor may have reduced the stock level before settlement and made up the difference in the price that way.

Employees are a specialized area of law and I always leave this one to the solicitors to work through. However the main aim is for both parties to understand their rights and obligations to the staff. The Vendor needs to ensure that all financial entitlements including sick leave, super and long service leave are accounted for and the method of how this will be handled in the contract also needs agreement from both parties. The Purchaser is mindful of making sure he is not going to be stuck with staff he does not want once he takes the business over. In many cases the Vendors (life) partner works or takes a wage from the business and the pharmacist manager that the purchaser may wish to replace with him /herself. These matters need careful planning and the reemployment of staff laws is susceptible to regular change.

The restriction of trade relates to the protection of the goodwill that the purchaser is paying to the Vendor. In Metro areas the average rules are that the Vendor can’t buy another pharmacy within five kilometers and for a period of say three years. If you are in country or rural areas the distance rule can be much greater. In addition to this clause the Vendor can work within the area but say for only 30 days within a twelve month period. The aim is of course not to lose customers that had a good relationship with the old owner who now works for your direct competitor.

Outstanding debtor is always interesting. The way this works is after settlement the new owner collects the money on behalf of the old owner and pays it to him monthly for three consecutive months less a fee of between 7% and 10%. The Vendor (old owner) likes to follow this up and more aggressively wants people to pay there as the new owner wants it paid but also does not want to develop a bad customer relationship. My view is that they are already bad customers if they don’t pay their account. The actual dollar value is less these days, however big accounts like nursing homes and country town customers can add up. Most people pay on the credit card these days.

In the contract it is important to understand that the fixtures and fittings are being purchased with ‘free title’ that means that if the fixtures and fittings are currently leased, then that lease is paid out at settlement and therefore the commitments of that lease are not passed onto the purchaser unless he/she is aware of this arrangement. It is not common to transfer this lease as the term is shorter and the residual amount is usually a large amount of money. Most leases are organized with the purchaser’s finance from the beginning of the deal. It is easier, cleaner and the lease if what you agree to and not what was negotiated before your time. Not to mention that interest rates changes.

The lease of the premise has been documented and discussed many times over. It still amasized that there is so many issues involved. The following needs to be in place as soon as practically possible:

Purchasers references as requested by the Landlord – usually to business and one personal.

Copy of Assets and Liabilities statement - not written on the back of a serviette

Correct forms completed correctly and signed as required to present to the Landlord

Financial documentation on behalf of the purchaser to present to the Landlord – this area needs careful presentation and understanding and is usually presented from the Purchaser’s solicitor to the Landlords solicitor. It takes time and needs the appropriate attention early.

There are many aspects to the contract and if planned out in a cooperative manner most clauses are common sense solutions to each element of a deal.

In my opinion an experience solicitor that has a history of selling pharmacies is always better and he/she is not learning what is required along the way.

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