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Business
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9/28/2011
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Purchasing a pharmacy from an Insolvency Practitioner
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The current economic climate continues to provide opportunities to buy distressed businesses. With the ongoing drive by the government to cut NHS spending, pharmacies are not immune from encountering financial difficulty. Charles Russell's Martyn Kolankiewicz and Tim Jenkins explore the issues...
When acquiring the business of an insolvent pharmacy as a going concern from an Insolvency Practitioner (a licensed insolvency specialist), a purchaser should be aware of how the insolvency process works, as well as the benefits and the risks. Buying a pharmacy business from an Insolvency Practitioner can be an opportunity to acquire the business at a competitive price. However, such an acquisition may be more risky than a normal business purchase and the price offered should reflect the risks for the purchaser.
Whilst it is possible that a purchaser of a retail pharmacy business may acquire a business from a Liquidator, Receiver or Administrative Receiver, it is likely (for the reasons set out below) that a prospective purchaser will be dealing with an Administrator.
The purpose of administration
Administration is one of the options open to an insolvent business. It allows the reorganisation of an insolvent company, whilst protecting it from its creditors.
The value of the business
The value of the goodwill in a pharmacy business derives primarily from its NHS Contract. If a Liquidator is appointed over a business which owns an NHS Contract, the value in the NHS Contract cannot (ordinarily) be sold on to a third party. This is because a Liquidator’s function is usually to close down the business with no intention to trade. An Administrator however, has the power to trade the business so that it can be sold as a going concern and the value in the NHS Contract can therefore be preserved, and included within the purchase price.
As with any pharmacy asset purchase, change of ownership consent from the relevant PCT in relation to the NHS Contract must be obtained prior to the completion of the purchase and whilst the seller /Insolvency Practitioner is the operator of the pharmacy. It is therefore important that a potential purchaser of a pharmacy business from an Administrator ensures that the NHS Contract can be transferred on completion.
Management agreement
The process of obtaining change of ownership consent from the relevant PCT (see above) can take several weeks. An administrator is likely to seek to exchange contracts to sell at an early stage with completion deferred pending PCT consent on the basis that the purchaser will purchase the stock in the pharmacy and take over its operation (and overhead costs) from exchange of contracts.
There are a number of areas of risk for a purchaser in this interim “management period” pending final completion. In particular a purchaser should consider the extent to which they may “inherit” employees (under TUPE – see below) on exchange of contracts (even if matters do not complete) and the risk of paying any of the purchase price ahead of final completion.
Warranties and indemnities
The administrator will have only very limited knowledge of the pharmacy’s business and assets. As a result, insolvency sale contracts are usually very one sided. The Administrator will not provide any title covenants and the sale will be subject to any third party rights that may exist. The Administrator will also be unwilling to commit to any personal liability and will similarly be reluctant to commit to any continuing obligation.
Stock
The pharmacy business is likely to have stock in trade, as well as equipment on the premises which a purchaser may wish to acquire. The stock price is normally payable in addition to goodwill and is verified by an independent stock valuer on completion. The purchaser will need to take care with stock which has not been paid for by the Administrator/Seller (suppliers normally offer payment terms). The Purchaser will normally assume the cost of having to deal with unpaid suppliers and the stock price should reflect this risk.
Land/buildings
If the purchaser wishes to use and occupy lease premises following the sale then ideally the purchaser would take an assignment of the lease. This can be time consuming, normally requiring landlord consent.
It is common for the Administrators to grant the purchaser a short term licence to occupy the premises whilst the purchaser negotiates with the landlord. However, the purchaser should take care since the licence to occupy is determinable by the Administrators without notice. If the purchaser will not be able to relocate the pharmacy on completion of purchase then it should consider making payment of the purchase price conditional upon securing the transfer of the lease.
Employees
Another important issue for the purchaser will be the impact of employment legislation and in particular the transfer of undertakings (protection of employment) regulations 2006 (otherwise known as “TUPE”). Under TUPE where there is a “relevant transfer” of a business undertaking, the contracts of employment of those employees working in the pharmacy to be sold (together with all rights and liabilities in connection with their employment), will in general automatically transfer to the purchaser on completion of transfer by operation of the business. It is not possible to circumvent TUPE and the best that a purchaser can do is to undertake due diligence to calculate the extent of the potential exposure. It is therefore essential that the purchase price reflects the degree of risk that the purchaser is taking.
Other issues
There may be numerous other issues and factors which the purchaser should consider and specialist legal advice should be obtained.
The above is a general overview and we recommend that independent legal advice is sought for your specific concerns. Tim Jenkins is a partner and head of the pharmacy transactions team at Charles Russell LLP and can be contacted at Tim.Jenkins@charlesrussell.co.uk. Martyn Kolankiewicz is a solicitor in the insolvency team at Charles Russell LLP and can be contacted at Martyn.Kolankiewicz@charlesrussell.co.uk.
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