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Vinku Shah examines different sale strategies and some planning points to consider…

Community pharmacy is one of the oldest businesses in England and has roots dating back more than 800 years when the Guild of Pepperers was formed in 1180 to regulate the early trade in spices and medicinal substances.

The Worshipful Society of Apothecaries was formed in 1617 and was the first formal body dedicated to training and regulating pharmaceutical and medical professionals. The pharmacy sector has outlived many other sectors and is still going strong with business owners exiting and passing on the baton to the next generation of pharmacists every year.

Community Pharmacy has been a unique business and we deal with many pharmacists looking to acquire their first pharmacy businesses as well as existing pharmacy business owners looking to expand their portfolios. On the other side there are pharmacists selling their business due to various reasons and retirement being the most common one.

There are two routes to selling a business – a share sale or an asset sale.

Share Sale

This is where a seller is disposing off the shares in the business and the buyer acquires the company with all existing contracts, the NHS contract, employees, goodwill, etc. and also takes over the assets and liabilities existing in the business at the date of take over.

For the seller, this is a clean exit and usually tax beneficial. The buyer takes on the company with all its history and assumes the risk associated with the ongoing business upon acquisition.

A share sale needs forward planning as potential buyers, their advisers and lenders will scrutinize at least three years of financials therefore, before you plan to sell your business, it is advisable to get a pharmacy specialist accountant on board four years ahead and this is more important as the company has other assets that you may want to retain for example, freehold property, investments, excess cash reserves, etc..

Asset sale

Under an asset sale, the seller sells the goodwill, fixtures and fittings plus stock at valuation. The buyer would usually acquire the business under their own company and presents less risk to them. The seller would retain the company but usually this is not usually tax efficient as the company would pay tax on any capital gain at the corporation tax rate in force.

Asset sales are more common when a company with multiple branches is disposing off one or two branches. There are a number of exit strategies that could be used for an exit from the business either entirely or through a phased exit.

Transfer of shares to children

If your children have trained as pharmacists and may have worked for the business, then it will most likely be that you would want then to take over the reigns in your business.

This strategy is useful for long term succession and inheritance tax planning. There are a number of taxes that will need to be considered namely Inheritance Tax (IHT) and Capital Gains Tax (CGT) and how these can be mitigated since transfer of shares to children would be considered a disposal at market value and could trigger a tax charge.

Sale of business to key employees

Pharmacy is a legacy business as business owners and their teams build up strong relationships with the community over the period of their ownership.

Retiring pharmacists will want to ensure the business will carry on in the same vain post exit and they may decide to offer the business to their key employees i.e. pharmacists, pharmacy manager, etc. This could be done in several ways below.

Share sale to key employees

This is when the owner is looking for a clean exit and may offer the business to their key team members initially before listing on the market.

The employees know the patients and the operational needs of the business and therefore the retiring owner will be assured that the business is being left in capable hands.

Share sale in tranches

The business owner may decide to sell in tranches over time to phase their exit for example selling a 25 per cent stake over four years. This helps the key employees to come to grips with the financial aspects of running a business as well as ease the pressure of having the full finance required for a complete take over.

Enterprise management incentive (EMI) share options

EMI share options allow pharmacy business employees the right (option) to buy shares in the company in the future at a fixed price (often current value) provided certain conditions are met.

There are significant tax advantages for both employer and employee. This is a valuable to incentivise the employees as they stand to benefit from the increase in value of the business over time.

The employees can be granted options at current valuation and exercise the option prior to any sale of the business thereby benefiting from not having to invest and also gaining from the increased value and lower CGT rate.

The business also receives a corporation saving on the options exercised by way of relief at corporation tax on the increase in value.

There is also protection for the employee should the value of the business fall in which case they simply do not exercise the option.

Points to consider

Pre-sale due diligence preparation…

We recommend appointing a pharmacy specialist accountant with a proven track record at least four years in advance of sale so that you present financials which instill confidence to potential buyers, their advisers and their lenders.

This also helps facilitate a smoother sale transaction and any issues are resolved early on. An accountant with experience in pharmacy sale transactions will guide you on what information will be required so that you have everything in order.

Valuation considerations…

Valuation of the business will be based on a number of factors such as EBITDA, turnover mix (NHS, OTC and service income), location, commercial lease, etc. You should be thinking of maximizing value of the business well in advance of any planned sale and therefore it is important to have the right advisers onboard early on. 

Capital gains tax planning…

There may be a need to carry out potential restructure of the business should the business hold material non-trade assets to ensure Business Asset Disposal Relief (BADR) allowance is available on sale. This will need to be carried out at least 2 years in advance to ensure BADR availability which is currently £1 million per shareholder subject to qualifying criteria.

Inheritance tax planning…

Transfer of shares to children may qualify as Potential Exempt Transfers and there would be no immediate IHT charge on transfer but becomes chargeable if the donor dies within seven years. However, the shares may also qualify for Business Property Relief (BPR) which can still protect the transferred shares from IHT subject to certain conditions being met by the recipient of those shares.

The decision to sell you pharmacy is never easy as the business will have been part of your life for many years.

You will certainly have an attachment to the business that you have created and the difference you have made to people’s lives over the years, including the team that has helped you get there. You will have surely thought about selling for some time before you decide to market the business. Sometimes a sale could also be triggered due to an unexpected change in circumstances.

There is an absolute need to plan well ahead of time and consider what you can do to ensure you get the right offer and that the whole process is smooth.

Vinku Shah is a partner at Xeinadin.