Multiple opportunities for independent buyers?
Tertius Alberts looks at the key aspects to consider when assessing an opportunity to purchase from a multiple and the factors which may influence choice…
Since the end of 2022 there has been a flurry of NHS retail pharmacy branches being put up for sale by multiples, resulting in plentiful opportunities for existing and first-time operators. What factors should you consider if you are thinking about a purchase?
Usually, the sale structure for a pharmacy purchase is a point of negotiation between buyer and seller, who will often have differing views. When purchasing from a multiple, unless a hive down of multiple branches into a newly formed subsidiary has been pre-agreed, all transactions will proceed by way of an asset sale. In these circumstances, a buyer will normally acquire the goodwill, stock, fixtures and fittings of the branch but will not, unless specifically agreed otherwise, acquire any existing liabilities of the branch.
Commercially it’s worth noting that, given the scale of a multiple’s operation, IT and contracts relating to IT systems are usually excluded from sale. A buyer will need to ensure that it has its own IT hardware contracts in place for completion (and liaise with the seller and its IT provider to ensure that service provision is not interrupted when installing the IT on completion of the purchase).
As part of the usual sale process a buyer needs to carry out due diligence to review and check all aspects of the branch, both legal and financial. When purchasing from multiples, a buyer will usually be provided with a pre-populated data site of key financial data and details relating to property, employees and included contracts.
It worth noting that, given that sales by multiples are usually conducted in an auction sale manner, the process does not typically allow for the buyer to raise standard due diligence enquiries.
That said, since a buyer is acquiring only the defined assets of the business (and since most of the liabilities will be excluded from transfer), generally speaking the standard due diligence process on an asset purchase is less in-depth than a share purchase.
A buyer will also tend to find that, with these types of sale, less extensive warranties and non- compete commitments are given by the multiple (as seller) in the contract of sale.
Prior to being given the opportunity to access due diligence information, a reservation fee is usually paid in exchange for a period of exclusivity. This reduces the risk of the multiple opting to sell to someone else, but it is important to note that reservation fees tend to be non-refundable. If a buyer will require bank funding for the purchase it is advisable to obtain an “in principle” offer of funding prior to paying any reservation fee.
Timetable and consents
The timeframe for the proposed transaction will be set by the multiple and a buyer will need to ensure that its advisors are on hand to be able to assist on a condensed deal timetable. Whilst it will be expected that a buyer will proceed to exchange of contract as soon as possible, subsequent completion will usually be conditional upon obtaining both NHS change of ownership consent (for NHS pharmacies) and landlord consent for the assignment of the lease (if the premises are leasehold).
Once a reservation fee has been paid, the process of obtaining consent for the transfer of the NHS contract will usually commence. This involves an application to NHS England and for new contractors the process may take longer than for an established contractor.
It used to be the case that multiples were only interested in cash buyers, but recently there has been an increase in first-time buyers with bank loans who have had offers accepted. As with first time buyer status, it is important that a buyer who will be seeking bank funding identifies and makes the multiple aware of any lender conditions at an early stage (preferably prior to paying any reservation fee). It is likely that a lender will require a minimum term remaining on the lease for funding purposes.
From a practical perspective, when negotiating the purchase contract, a buyer will need to ensure that, when it commits legally at exchange, it also has a commitment from its lender. It’s likely that the bank will require a business valuation (and possibly a property survey) prior to lending – where possible it is advised that those be undertaken prior to the buyer exchanging contracts for the purchase.
The property from which the branch trades is an essential part of the business (since the NHS contract is tied to the premises) and will also be a key asset for a lender in security terms. With the transaction being an asset purchase, the property will need to be transferred to the buyer at the time of completing the purchase.
If the property is leasehold (which the majority tend to be), the landlord’s consent to the assignment of the lease will be needed. Obtaining landlord consent will be a process dealt with by the multiple, but depending on the buyer’s covenant strength, the buyer may need to provide the landlord with either a personal guarantee and/or a rent deposit.
A final key consideration for any asset sale relates to the branch employees. This is an area that should be handled carefully by both the buyer and the multiple. The employees’ rights are protected by the Transfer of Undertakings (Protection of Employment) Regulations (“TUPE”). The general position is that the employees will transfer to the buyer with the same rights and benefits as under their employment with the multiple.
When purchasing from a multiple there may be certain policies and benefits which apply for the employees that one might not see in independent-owned pharmacies (eg, staff bonus schemes, PHI benefits, trade union recognised agreements). Buyers will need to be carefully advised in this area given the rights that employees enjoy under TUPE.
The above is a general overview and we recommend independent legal advice is sought for your specific concerns. If you require further information in relation to the points raised in this article, contact Tertius Alberts who is a corporate solicitor and member of the pharmacy transactions team at Charles Russell Speechlys LLP. He can be contacted on email@example.com.