Buying a pharmacy in financial difficulties can be an opportunity to acquire a business cheaply and quickly. But pharmacy law practitioner Richard Hough highlights legal issues to consider

Community pharmacies continue to operate in a challenging commercial environment. Unfortunately, not all of them manage to stay afloat. So what happens when a pharmacist proprietor can no longer fight the financial tide and is forced to instruct an insolvency practitioner? What benefits are there to be had and what risks face the speculator when an opportunity arises to purchase a distressed pharmacy business?

Firstly, buying a distressed pharmacy business can be a great opportunity to acquire a business quickly and at a competitive price. However, the reduced price should reflect the additional risks assumed by the purchaser. Therefore, specialist legal advice should always be sought when acquiring a distressed pharmacy business as a going concern, or even just its assets, from an insolvency practitioner.

An insolvent pharmacy can be put into a number of different insolvency processes. The most likely ones, that would enable a buyer to acquire a pharmacy business as a going concern, are either a company voluntary arrangement (CVA) or an administration.

Alternatively, a company operating a pharmacy could be placed into liquidation, where a liquidator closes down the business with no ongoing intention to trade. It would be difficult to purchase a pharmacy as a going concern from a liquidator, although individual assets (such as stock, assignable contracts and fixtures and fittings) could be purchased.

The CVA

A CVA is an agreement between a company’s creditors and the company itself in settlement of the company’s debts. It can be used as a mechanism to allow the company to continue to trade under the control of the existing directors, pending the sale of the business and its assets.

Once the CVA is agreed by the creditors, the CVA creditors cannot take action against the company unless the terms of the CVA are breached. The CVA might therefore be used to give the company breathing space in which to arrange the transfer to a buyer of the right to be included in the pharmaceutical list (the ‘NHS contract’), while allowing the company’s directors to continue to trade pending the transfer of the NHS contract and the sale of the business.

Specialist legal advice should always be sought when acquiring a distressed pharmacy business as a going concern

Approval for the transfer of the NHS contract can take several weeks and potential purchasers should be aware that creditors may take action against the company before the terms of the CVA are agreed. Therefore, the company will be at risk during this period.

The administrators

An administration protects the company against creditor action, both before and during the administration. The administrators take control of the business upon their appointment and the existing directors’ powers cease.

Administrators are normally inclined to sell a business quickly and are sometimes reluctant to trade a business in administration. This may cause an issue for a potential purchaser, who will need time to secure the transfer of the NHS contract before acquiring the business.

If the administrators are reluctant to trade the business in administration, they might agree to grant a licence to a buyer to operate the pharmacy pending the transfer of the NHS contract and completion of the sale. Given the complications of this process, the administrators and the buyer would normally need time prior to the administration to agree the commercial terms and legal documents. The licence could then be granted and the contract for sale exchanged as soon as the administration commences.

Considering risks

An administrator is likely to seek to exchange contracts at an early stage, with completion deferred pending receipt of approval of the transfer of the NHS contract, on the basis that the purchaser will purchase the pharmacy stock and take over its operation (and overhead costs) from exchange of contracts. There are a number of risks for a purchaser during this interim management period.

In particular, a purchaser should consider its statutory liability for transferring employees on exchange of contracts (even if the sale does not complete) and the risk of paying part of the purchase price ahead of completion.

When a business is sold as a going concern, the price for the pharmacy stock and equipment is normally payable in addition to goodwill and is verified by an independent stock valuer on completion. The purchaser should undertake due diligence to ascertain whether the stock has been paid for and, if not, whether it is subject to retention of title restrictions. The purchaser will normally assume the risk of having to deal with unpaid suppliers and the price paid should therefore reflect this risk.

The licence to occupy

The purchaser will often require a lease assignment, which normally requires landlord’s consent. In such circumstances, where time pressures are great, administrators may grant the purchaser a short-term licence to occupy the premises for the period during which the purchaser negotiates with the landlord.

However, purchasers should be aware that an administrator can terminate the licence to occupy without notice. If the purchaser cannot relocate the pharmacy on completion of the acquisition, it should consider making payment of the purchase price conditional upon securing the assignment of the lease.

Please contact either Richard Hough or Rob Turner at Brabners LLP on 0151 600 3302 or 0161 836 8821 if you are thinking of acquiring a distressed pharmacy business or if you require any assistance on insolvency matters generally.