One of the first and most important steps in purchasing a pharmacy is conducting financial and legal due diligence. Whilst most pharmacist purchasers are aware of the importance of completing financial due diligence, the significance of legal due diligence is sometimes overlooked. The extensive requirements contained in the law and regulations governing pharmacy transactions make it especially important to complete legal due diligence before purchasing a pharmacy.
Legal due diligence may have real implications on the financial position of the pharmacy business and its potential for future earnings. For example, there could be fixed term contractual arrangements with local aged care facilities or other similar businesses which generate a significant portion of the pharmacy’s revenue. In this case, it would be crucial to review such agreements to ensure the pharmacy will still receive the related profits after completion of the purchase. Some examples of what needs to be considered as part of the legal due diligence process in these circumstances are:
- Whether the vendor has the right to transfer their interest in any important agreements;
- Does the other party to any of these agreements have the right to withhold their consent to a transfer of the agreement?
- What is the remaining duration of the current agreement?
- Can either party terminate the agreement early and if so, under what circumstances?
Another central matter to the purchase of a pharmacy is the pharmacy premises. Accordingly, the legal documents in place relating to the current premises will need to be reviewed by as part of the legal due diligence process. Typically, there will be a current lease or sublease in place which will limit a purchaser’s ability to negotiate amendments to the lease terms. However, undertaking legal due diligence will help identify crucial matters such as:
- The remaining term of the Lease;
- If there are any options to renew the Lease and if so, how many and for how long;
- Under what circumstances is the lessee entitled to exercise these options;
- How often will rent be reviewed;
- What method of rent review is in place;
- What are the lessor’s maintenance obligations under the Lease;
- How much is the security deposit or bank guarantee that the lessee is required to provide;
- If there are minimum trading hours imposed by the Lease; and
- If there is a permitted use of the premises that may restrict any aspects of the pharmacy business?
If a purchaser does not consider these essential elements during their due diligence process, there may be adverse effects for the pharmacy business.
Whilst there is generally an existing lease in pharmacy transactions, in some cases a new lease will need to be entered into as part of the transaction. In such instances, we strongly recommend having a legal professional review the proposed lease, as the terms of this document may have significant impacts upon the future of the business.
Legal due diligence is just as important as the financial due diligence when purchasing a pharmacy business. Engaging a pharmacy lawyer early in the process of buying or selling will ensure that there are no hidden surprises which may compromise the transaction.
Important Disclaimer: The content of this article is general in nature and for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.
