What Due Diligence Should You Do When Buying a Pharmacy?
When you’re considering buying a pharmacy, there’s a lot of research involved to ensure you’re making the right decision.
From the nature of the business itself to the surrounding area, local footfall and even the regulatory aspects such as the NHS Contract, buyers need to do their homework to maximise their investment.
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Financial backers expect this research to be done and submitted as part of your business plan before they’ll approve your application - but they’ll also demand a legal process known as Due Diligence. This involves a detailed legal deep-dive into the purchase, where solicitors submit a list of requests to the seller’s solicitors in order to reveal the ‘full picture’ behind your potential pharmacy investment.
But what due diligence do solicitors do? What do you need to know about the process and how can you help expedite it? Whether you’re looking to buy a pharmacy or sell one, understanding the due diligence process can make you better equipped to get the most value you can from your potential investment.
Asset or share purchase
Due diligence changes depending on whether you’re pursuing an asset or share purchase. In an asset purchase, you are buying a specific set of assets from the seller, without taking on the business’ liabilities and obligations. Share purchases involve buying the entirety of the LTD company by buying their shares.
Share purchases are more stringent in their due diligence demands as your solicitors will need to comb through the history of the business and ensure you’re not going to be surprised with an outstanding legal case or anything similar. Asset purchases, while more straightforward, are still subject to due diligence though at a lesser intensity.
Areas of due diligence in a pharmacy purchase
Let’s take a look at all of the areas a solicitor must assess during the due diligence stages. Some of these elements are only relevant to the share purchase agreement or asset purchase agreement parts of the process, which we’ve marked as S.P.A or A.P.A only.
For the purposes of writing about these agreements, we’ll assume that you’re selling your pharmacy and have received the due diligence request.
Seller details (A.P.A only)
For completion purposes, you’ll have to list your name and address. Some other factors may be involved such as your date of birth, position in your business etc.
You’ll need to divulge any agreements related to the acquisition and disposal of any part of your business.
Corporate structure (S.P.A only)
You’ll have to provide a full list of your company’s corporate structure. This includes copies of your Certificate of Incorporation and any changes of name. You’ll have to show full ownership structure, including subsidiaries and associated companies, as well as any historic subsidiaries or ownerships.
You’ll also need to detail the full schedule of directors and secretaries, as well as copies of the company’s allotments, transfers, members, directors etc. Essentially, a full history of the business’ entire corporate structure and dealings.
Share capital (S.P.A only)
Full details of all shares within the company, including where they are issued, what class and denomination they have, whether they’re fully paid up or otherwise.
You’ll also need to provide the name and addresses of all shareholders, as well as the details of the shares held by them. Any schemes, options or contracts or other share-related elements issued or unissued must also be provided.
This is an extensive step where you’ll need your accountant involved to help you identify any unissued shares or more complex situations such as the buyback of shares or the redistribution of shares if your company was involved in an intra-group merger.
The solicitor will need to audit the full accounts of your company and will need to see any notes added to the accounts. This includes the director’s reports and must extend for at least three financial years. This also includes dividends and distributions made by the company since the last audited accounts.
All other relevant financial information such as FP34’s, management accounts and financial statements should also be provided.
Included within this area is the future-facing budget and forecast elements of your business. You’ll need to share any business plans or forecasts, even in draft form, prepared with respect to your company.
For an asset purchase, the requirement of the account is lessened and you’ll need to provide three years of financial records and any management accounts that include the business.
In both asset and share purchases the solicitors will want to see full copies of all documents related to overdrafts, loans, credit etc - any form of debt or financing should be recorded and provided during due diligence.
This also includes mortgages and any property debt, which is vitally important in any kind of business transaction and especially when you’re buying a pharmacy as you’re buying the premises too.
The level of finance-related searches occurring during a share purchase is far greater than in an asset one. Debts, grants, loans and even credit arrangements between yourself and customers are included.
Full property enquiries happen separately, but during due diligence solicitors will still look for the full schedule of your property details, assessing things like whether it’s a freehold or leasehold, what its land registry title is and any copies of title deeds. If you’re selling a property where you don’t have the freehold, you’ll need to supply evidence of devolution to the seller of the title of the property.
Regulatory and environmental
The solicitors must check the environmental situation around your business to ascertain the value of the investment. An environmental audit or ground investigation audit must be submitted, as well as any known breaches of environmental law. Any liabilities around environmental law must be divulged.
Contacts and trading (S.P.A only)
Solicitors will request full copies of a vast assortment of your contractual agreements. There are various stipulations around these contracts and they will be dependent on your business - but are largely to cover the buyer so that they know what agreements you have in place. For example, one area is whether you have any capital commitments for the sale or supply of goods/equipment exceeding £5000 in value.
In both share and asset purchases, you must list all of the assets pertaining to the agreement. In a share purchase, that means all of the assets, including any prices outstanding and any valuations in respect to them.
Assets are extensive, as they include everything from pharmacy equipment to computer software and even vehicles (if you have any within the business that are part of the sale, you’ll need to provide the logbook.)
Commercial & customers (A.P.A)
In an asset purchase, the due diligence process includes a simple request for the trading address of the business and the length it has been operating. You’ll then need to divulge a list of any major customers that account for more than 5% of the total business sales, as well as any quotations or tenders in relation to the business.
If you have any commission arrangements in place with customers you’ll also need to explain the structure. Customer losses, especially those which are significant or caused by abnormal factors will also be checked.
Intellectual Property & litigation
The solicitors will need evidence of all intellectual property rights owned, used, enjoyed or held for use by your company. You’ll need to issue any details of disputes related to these IP rights and details of any existing or suspected infringement of these IP rights.
Outside of IP, you’ll need to disclose any potential litigation, historic litigation or current litigation your business is experiencing. This includes products sold that might have been defective or subject to a recall.
Essentially, you’ll be handing over as much information as possible so that the buyer can ascertain their risk of future legal challenges.
Data protection & privacy
If your business has ever made notifications under the Data Protection Act 2018 or been subject to enforcement, you’ll need to detail it so that the buyer knows of any potential issues with the ICO.
As part of the European GDPR rules, you’ll also need to outline your GDPR policy.
Employees & Pensions
You’ll need to detail existing employees, their contract stipulations and hours worked. This is part of a process aimed at protecting employees from changes that may affect the working lives they have contractually agreed to. As part of this, you’ll also need to detail any pension schemes operated by the company - which includes contributions as well as the steps you’ve taken to comply with pension auto-enrolment.
You’ll need to outline any insurance arrangements in place, as well as provide evidence of any policy documents, premium receipts or certificates. You’ll also need to evidence any claims made under the policies within the past two years, including any which are currently outstanding.
Part of due diligence includes the full details of your pharmacy’s particulars - including everything from standard operating hours through to licenses, the addresses of account customers, details around prescription agreements, deliveries and collections and more. Essentially, you’ll be giving over as much information as possible to show that your pharmacy is a viable business.
A recent addition to due diligence is the inclusion of COVID-19 related information such as SSP reclaimed in relation to COVID-19, any staff unable to work due to it, any payments deferred through furlough etc.
Make due diligence easier with Rangewell
The buying and selling process, whichever side you’re on, is a complicated one. Work with Rangewell and we’ll either help you navigate the world of pharmacy finance.
In doing so, our role is to ensure the sale is as effective as possible - so we’ll also advise on the entire process including suggesting the right lenders and solicitors suit your application.
Aside from due diligence, securing your first pharmacy purchase relies on many other factors such as being approved for finance, writing a business plan that appeals to lenders and choosing the right pharmacy based on location, budget and footfall. Get started today by talking to our team.