Samuel Milne from Charles Russell Speechlys explores the actions buyers and sellers can take before a transaction begins to maximise their chances of avoiding potential delays….
At this year’s Charles Russell Speechlys pharmacy conference the team presented a talk on common causes of delays to transactions. Business interruption, frustrations and adverse economic impact are often associated with transactions being delayed beyond their intended completion date, so taking steps to reduce the chances of delays is important for both buyers and sellers.
The key asset for any NHS pharmacy is its NHS contract. Buyers will therefore wish to ensure that they will be inheriting the NHS contract as part of the transaction.
If a pharmacy is sold via a company sale, the expectation is that the NHS contract is held by that company. It is therefore crucial for a seller to confirm that such expectation is well founded.
Our experience tells us that such expectation does not always bear out and sellers can discover that the NHS contact is actually held by them personally or perhaps a previous owner.
In this scenario, a change of ownership application to NHS England would need to be made in order to move the NHS contract into the company’s name. This process can take between 3-4 months and so can disrupt the time frame of a sale process.
Where a business is sold via a ‘business’ or ‘asset’ sale, the NHS contract will need to be transferred into the name of the buyer, and so a change of ownership application to NHS England will always need to be made.
Once the application is made, control of the process is passed to the buyer who then has the power to request NHS England amend the pharmaceutical list without further recourse to the seller. Sellers can therefore be hesitant to sign the application forms at the beginning of a transaction (as they do not yet know for certain whether the deal will go ahead).
This could mean that there is a delay whilst the transaction documents are drafted, and only when they are signed is the change of ownership application made (which then takes a further 3-4 months to be processed).
At Charles Russell Speechlys, we have developed a form of contract which protects the seller’s interest in the NHS contract in the event that NHS England amend the pharmaceutical list before the transaction documents have been signed. This allows the application to be made at the start of a transaction, and avoids waiting until the transaction documents have been agreed.
Due Diligence Information
One of the first things that a buyer will wish to do when their offer for a pharmacy is accepted is conduct an investigation into the pharmacy they are buying.
This is called a ‘due diligence exercise’ and there are a number of reasons for doing this: firstly buyers will have to take over the day to day running of the business when the sale completes, and secondly buyers will wish to ensure that they are not inheriting any unknown liabilities (which may not have been detailed in the marketing material).
The buyer’s lawyer will generally circulate a questionnaire to the seller asking for both information about the pharmacy and also for copies of relevant documents (commercial contracts, insurance paperwork, employment contracts etc).
This process is the most likely aspect of a transaction to cause delays, as sellers have to juggle managing the business with answering the buyer’s questions and locating relevant documents. This means that it can take some time for responses to due diligence questions to be provided. We therefore advise sellers to begin collating important documents and information as soon as they can in advance of their business being marketed for sale, so that they are then able to provide replies to due diligence enquiries quickly and with minimal business interruption. This also helps to avoid a buyer asking for updated information if a transaction is delayed.
Buyers often look to banks to assist with the funding required to purchase a pharmacy. Banks usually conduct their own valuation exercise to satisfy themselves of the pharmacy’s value and it is important that buyers ensure that the bank undertakes that exercise as soon as possible. If that valuation is delayed, then that will have a knock-on effect on the transaction timescale.
Banks will usually take security over the pharmacy itself but may also insist on taking security over other assets belonging to the buyer or request personal guarantees from relevant individuals. If this is the case, it can take some time to organise that additional security and the sooner that process is started the better.
Hopefully this has given you a flavour of the sorts of areas to focus on to ensure your transaction completes in the timescales envisaged when the buyer and seller shake hands.
If you are concerned about any of the issues discussed in this article or wish to speak to someone about a pharmacy transaction, contact Samuel Milne (solicitor in the pharmacy transactions team) on 01483 252 525 or email [email protected]