What is the difference between an Asset sale and a Share sale?
Following on from guest blogger Steve Jeffers’ last piece, Steve uses this blog to discuss the two methods of pharmacy business sales you may come across as a first time purchaser.
First time buyers may not have come across this before but a pharmacy business can be offered for sale in two distinctly different ways.
Asset Sale
In this scenario the business is usually described as being for sale; asking for offers for the goodwill, fixtures, fittings plus stock at valuation. If the freehold of the property is also being offered for sale then the cost of this will be in addition to the above.
What this means is that the buyer is buying:
The pharmacy contract
The physical fittings and fixtures in the pharmacy
Assets like delivery vans etc
The buyer is also committing to buying the freehold or taking on the lease obligations (assuming the landlord approves of the transfer which will be the focus of another article).
A cut-off date is mutually agreed, normally at the end of a month to coincide with NHS payments. Any creditors or debtors owed before the cut-off date are the responsibility of the vendor. Anything afterwards becomes the responsibility of the purchaser. Other than ongoing professional investigations basically anything before the cut-off date is the responsibility of the vendor. It’s very important to have the fixtures and fittings of the pharmacy listed so that both parties are aware of what is being sold. e.g. Is the delivery van included or not? The stock is valued on the day of the purchase and usually requires paying for in full within 14 days.
It’s also vital that the transfer of the lease from the vendor to the purchaser is firstly, allowed in the lease. And secondly, that it is understood by both parties what their obligations to the landlord will be in terms of legal fees associated with the transfer.
The transfer of the pharmacy contract from the vendor to the purchaser will have to be approved via a change of ownership application. This application is made via the local NHS commissioners. It can take 3-4 months to be completed (it has been up to 6 months in certain areas). This time frame needs to be factored into the purchasing process. There are ways to speed up the purchase but that’s for another article!
Share Sale
If the pharmacy vendor operates as a limited company then they have the option of either selling the pharmacy alone or selling the company by way of a share sale. The decision as to which route to take for the vendor will depend on tax advice from their accountants.
The pharmacy is then advertised for sale as a Share Sale of XXX Ltd plus or minus Net Current Assets (NCA).
Usually, but not always, the property lease or freehold will be part of the company, as will the pharmacy contract. Therefore, there is no need for a change of ownership application process. Remember though, the NHS and GPhC will need to be notified of any new directors and superintendent pharmacists. Again, a suitable transfer date will be agreed at the end of a month to make accounting easier.
The stock will be valued as before but this time its value forms part of the NCA of the company. All the assets, creditors and debtors will be balanced out at the point the company is sold. The purchaser is liable for all invoices, even those before the date of the purchase but also receives any outstanding income, usually the NHS payments. Both parties’ accountants have to agree what the balancing figure of the NCA is. The actual process will be laid out in the legal documentation. It is sensible for both the vendor and purchaser to know what the estimated NCA is likely to be in advance of the sale. This lets both parties keep aware of what the balancing payment is likely to amount to. The NCA is usually agreed 3-4 months after the purchase date to allow time for all invoices and credits to be received.
A share purchase process could therefore be quicker for the vendor. However, this route complicates the financial due diligence that the purchaser has to undertake. The new owner will be liable for all previous actions (both professional and financial) of the company that they now own. Including the companies tax obligations. The legal process is also more complicated. The purchaser will need the vendor to indemnify them against specified past actions and your solicitor will play a vital role in protecting you.
Always use a pharmacy specialist solicitor as this niche area of business is complex. Using your mate who is a conveyancing solicitor is not recommended!
Read the first blog in the ‘Buying your own Pharmacy Business’ series here.
If you need some informal advice now on how to purchase your first pharmacy then contact steve@pharmacyseekers.com