Deciding whether to purchase a business is not an easy decision, and one of the first stages is completing due diligence, writes Sarah Stoddart
Deciding whether to purchase a business is not an easy decision. It is daunting and there are a number of stages to be fulfilled before achieving completion. One of the first stages is completing due diligence investigations.
Traditionally, the due diligence stage involves the prospective purchaser working with his or her accountant to review the financial documentation of the business, conduct a valuation and work through some forecasting exercises. Whilst there is no denying the importance of financial due diligence, there is more to the process which is often overlooked…until it is too late.
This article outlines the importance of legal due diligence and ways that your specialist pharmacy solicitor can assist you with the process.
From a legal perspective, a purchaser of a pharmacy business should, at a minimum, investigate the following key issues:
- Tenure – is there an existing lease? When does it expire? Are there any clauses which could result in an early termination?
- Nearby Medical Practitioners – have you seen a “top doctors” report? Where are the nearby medical practitioners? How committed are they to the practice they are working in?
- Pharmacy Location Rules – where is the nearest competitor? Is there a possibility that a competitor could relocate, or a new pharmacy could be established, within close proximity to the business?
- Site inspection – Have you walked the floor of the pharmacy? Do you know its access limitations and advantages?
A lease is fundamental to the existence of most pharmacy businesses. Although in most transactions the existing lease of the premises is assigned or transferred to the buyer on completion (and as such there is limited scope for amendments), it is essential the lease is reviewed by your solicitor during the due diligence period.
When reviewing the lease, it is important to consider the expiry date of the lease, the existence of any option periods, the expiry date of the anchor tenant’s lease and whether there are any clauses which could result in the early termination of the lease, such as a relocation clause or demolition clause. It is also important to consider what security may be required by the landlord and whether, as a prospective purchaser, you are willing and able to provide that security. Such security may include a bank guarantee and/or personal guarantee.
The lease may also include clauses regarding the core trading hours of the business, exclusivity, restrictions on items which can be sold from the premises or restrictions on subletting part of the premises to other tenants, such as pathology providers or allied health service providers. If a purchaser does not work with his or her solicitor to identify and consider these clauses during due diligence, the viability of the business and the purchaser’s future business plans could be detrimentally impacted.
Nearby Medical Practitioners
Medical practitioners are fundamental to a busy “back shop”. During due diligence, a purchaser should obtain a copy of the pharmacy’s “top doctors report” to identify which medical practitioners are generating the majority of prescriptions filled by the pharmacy.
Subject to any restrictions contained in the contract, the purchaser should contact the nearby medical practitioners and speak to them about their practice, the health issues of the local community and how the pharmacy and the medical practitioner could work together. Such discussions are often the source of excellent business ideas which leads to growth of the pharmacy business.
Pharmacy Location Rules
It is prudent to consider any potential moves a competitor could make which could impact on the viability or profitability of the pharmacy being purchased.
Purchasers should consider the location of the nearest pharmacy businesses, the options available for existing pharmacies to relocate within one kilometre of their existing premises (and potentially closer to the business being purchased) and any opportunities for new pharmacies to be established near the pharmacy business, including within a shopping centre or large medical centre. When considering these issues, purchasers are encouraged to seek advice from a solicitor who has experience with the application and interpretation of the Pharmacy Location Rules.
Although there is limited ability to prevent a third party from relocating an existing pharmacy business or establishing a new pharmacy business within close proximity to the pharmacy being purchased, the importance of considering such possibilities should not be overlooked as the outcomes of such considerations can influence the purchaser’s future business plans.
Every purchaser should ensure they visit the pharmacy they are proposing to purchase. However, site visits may require the consent of the seller and may need to be conducted after hours so the employees and normal operation of the business are not disturbed. The purchaser should work with the seller to ensure any site inspection occurs at a time that is mutually convenient to both parties.
When visiting the pharmacy, the prospective purchaser should consider the layout of the pharmacy, the size of any storeroom or staffroom area, car parking facilities and any access limitations or advantages.
A thorough due diligence investigation avoids surprises (or disappointments!) arising when it is too late! Look for the devil in the detail and involve your solicitor in the process.
Sarah Stoddart is an experienced principal lawyer who specialises in pharmacy, commercial and employment law matters including business transactions and leasing. Should you have any queries, please contact Sarah on (07) 3370 0200 or firstname.lastname@example.org