INTRODUCTION
Canada’s pharmacy market is comprised of roughly 14,000 pharmacies with a combined value of $47 billion. The relatively stable profits from this market have made purchasing a pharmacy an attractive investment.
This guide will help you understand how to prepare to make an offer, incorporate your pharmacy business, secure financing, and navigate the buying process to make a strategic purchase.
PLANNING TO PURCHASE
Craft a business plan before you search for pharmacies on the market. Your plan should model how to profitably run your pharmacy, list people who will serve you as advisors, and detail a future exit plan.
Ensure that your business plan covers key areas, such as financial projections, operational procedures, required technology, human resources, and marketing initiatives.
ASSET OR SALE PURCHASE
You will need to decide if you want to purchase the pharmacy through an asset purchase or share purchase arrangement. Each purchase structure has its own advantages and disadvantages.
Asset Purchase
Acquiring a pharmacy through an asset purchase means that you will buy the assets of the business instead of the business as a whole. The assets you purchase could include equipment, inventory, goodwill, customer lists, cash, and real estate. Note that the seller will retain control of the business as a legal entity.
One benefit of acquiring a pharmacy through an asset purchase is that you will not acquire the company’s liabilities or obligations. Because you are only acquiring the business’ assets, any negative history of the pharmacy has will not attach to your name.
You may also be able to purchase the pharmacy’s goodwill in a way that allows you to reduce your taxes. Goodwill is an intangible asset that can be created if you pay more than the agreed-upon value of the purchased assets. Goodwill is eligible capital property that could be written off your taxes.
Purchasers generally prefer asset purchases because the transaction is cash-free and debt-free.
Disadvantages
It is important to note that entering into an asset purchase can be a very time-consuming process. For example, you will need to dedicate effort to negotiating new supplier contracts to ensure that the pharmacy receives the inventory and equipment it needs to operate.
You may have to acquire a new lease to buy the real estate and a new line of credit to fund the purchase. Moreover, you will need to apply for a new Ontario Drug Benefit number and new licenses through the Ontario College of Pharmacists (OCP). More details on OCP requirements can be found below.
Share Purchase
In a share purchase, you will acquire the pharmacy as a whole by purchasing the shares in the business. Consequently, you will become the owner of the legal entity under which the business operates.
Share purchases are often less complex compared to asset purchases because new leases and lines of credit do not need to be negotiated. Additionally, you can also save time by using the employment agreements and OBD number of the previous owner.
There may also be tax benefits with a share purchase. For example, you might be able to apply the previous owner’s losses against your taxable income to lower your payable taxes.
Sellers generally prefer share purchases because they are simpler.
Disadvantages
Share purchases do not allow you to benefit from the goodwill tax deduction that is possible in an asset purchase.
The liabilities and obligations of the pharmacy will attach to your name because you become the legal owner of the business. Consequently, it is important to thoroughly learn the pharmacy’s past business practices to understand what negative history and you might be taking on.
WHAT TO LOOK FOR
Financials
Consider the true earnings of the pharmacy as one of the most important factors in the decision to buy.
Generally, you want to see a practice operating at 40% profitability. The seller should have easy-to-read financial information available on the pharmacy for the last 3 – 5 years.
Look for positive indicators in the seller’s
financial records with your accountant, including tax returns, balance sheets, and profit and loss statements.
Additionally, assess key business information about the pharmacy that could reveal its long-term profitability:
- Inventory count;
- Refill rates;
- New fill rates;
- Average script prices; and
- Top 100 drug sales.
Location
Ideally, the pharmacy will be located close to a doctor’s office and major retail outlets. Look for locations that are easy to access and have heavy foot traffic. For example, the ground floor of a mall or on a busy intersection of a city. Nearby residential areas could also supply new customers.
Moreover, note the location of other pharmacies in the surrounding area. Few nearby competing stores could lead to more sustainable business growth.
FRANCHISE ISSUES
It is important to know whether the seller operates their pharmacy independently or as a part of a franchise.
Independent pharmacies
If a pharmacist operates independently, without any affiliation to a brand owned by another corporation, then the pharmacist owner controls all elements of the pharmacy’s operation.
Many pharmacists operate under a banner agreement. Examples of banner pharmacies include Guardian, IDA, PharmaChoice, Remedy’sRx and UniPrix. These pharmacies are independently owned, community-based pharmacies that often depend on their relationship with local customers.
As a buyer, you would only need to consult the seller to purchase the pharmacy as a whole.
Franchise pharmacies
Some pharmacists operate their pharmacy under a franchise agreement. Examples of franchise pharmacies include Shoppers Drug Mart, Pharmasave, and Rexall.
As a buyer, you would need to understand the pharmacy owner’s franchise agreement to know the conditions they must abide by to sell the pharmacy.
INCORPORATING TO BUY
Pharmacy professional corporations
Under the Ontario Business Corporations Act and the Regulated Health Professions Act, a pharmacy can be incorporated to operate as a pharmacy professional corporation (PPC). PPCs have many benefits to consider for incorporating to buy your pharmacy.
Tax benefits of incorporation
Lifetime capital gains exemption
If you buy the shares of a pharmacy as a PPC and later sell any of its shares, you may be able to use your lifetime capital gains exemption (LCGE) to reduce your capital gains taxes on the sale. When you sell the shares of your pharmacy, the gain on the sale (proceeds from the sale minus the original purchase price) is taxed as capital gains. If you
qualified for the exemption in 2022, you may have been eligible for $913,630 in LCGE.
Qualifying for the capital gains exemption
To be entitled to the LCGE, your corporation’s shares must be considered qualified small business corporation shares (QSBCS) by meeting several conditions set by the CRA.
Other benefits of incorporation
Limitations on liability
In an unincorporated business, you are exposed to substantial personal liability. Incorporation creates a separate legal entity that takes on more liability from your purchased pharmacy. Shareholders of a corporation are not personally liability for commercial debts – unless they personally guarantee those debts.
Stability and ease of transfer
The continued legal existence of the corporation provides more long-term stability for your pharmacy. The ability to sell and purchase shares of your purchased pharmacy as a PPC can also facilitate an easier transfer of ownership in the future.
Flexible structures
PPCs allow pharmacists to share the ownership of the corporation by issuing shares while remaining in control of the business under certain corporate arrangements.
Limitations of incorporation
Operating a corporation such as a PPC also includes some limitations.
- The activity of the PPC is restricted to operating a pharmacy under the conditions of the OCP.
- Only members of the OCP may hold shares (voting or non-voting) in a PPC.
- Incorporation does not protect a pharmacist from all professional liability claims (e.g., personal professional liability to a pharmacist’s clients).
The incorporation process
(1) Form a corporation
Create a corporation with a name that complies with the regulations and restricts its activities to the operation of a pharmacy.
(2) Create a shareholders agreement
A shareholders agreement (SA) protects you and your business by outlining a clear structure for the rights, obligations, and relationships between the parties. SAs provide guidance on various practical issues (e.g., when and how to hold meetings, how shares can be sold, etc.). SAs are also helpful for dispute resolution between shareholders and for planning how to address future issues.
(3) Apply for a Certificate of Authorization
Your PPC must have a certificate of authorization from the OCP to operate as a pharmacy. You want to check that the seller has a valid certificate of authorization to ensure that the pharmacy has been operating with the permission of the OCP.
(4) Purchase the seller’s shares
Next, your PPC will enter into a share purchase agreement to buy the shares from the seller’s PPC. Alternatively, you will enter into an asset purchase agreement to have your PPC purchase the assets from the pharmacy owner.
(5) Amalgamate the two corporations
When the seller is another PPC, your corporation will purchase their shares. This involves an amalgamation (or joining) of the two corporations into one new PPC. Your new PPC will then need to obtain a certificate of authorization from the OCP to operate as a pharmacy in Ontario.
OCP NOTICE REQUIREMENTS
Issuance of a new certificate of accreditation by the OCP is required when a new pharmacy is purchased. A new certificate is required because the OCP considers purchasing a pharmacy as equivalent to opening a new pharmacy. To be accredited, the applicant(s) and the new pharmacy must meet all the criteria set out in the Drug and Pharmacies Regulation Act (DPRA) and its regulations.
Applying for a new OCP Certificate
Part of the rationale for requiring an application for a new certificate is for the OCP to determine “if past and present conduct of the proposed owner(s) affords reasonable grounds for the belief that the pharmacy will be operated with decency, honesty and integrity and in accordance with the law.”
When a new certificate is required
The OCP requires issuance of a new certificate of accreditation when there is a change in legal “ownership.” Purchasing a pharmacy would be a legal change in ownership. Amalgamating two or more corporations, where one operates an accredited Ontario pharmacy, is also equivalent to purchasing an existing pharmacy and thus, requires a new certificate.
When a new certificate is not required
By contrast, a new certificate is not required when there is a change in the designated manger (DM) of the pharmacy because the DM is not an owner but, rather, a managing pharmacist designated by the owner of the pharmacy.
Timeframe for notifying the OCP
Apply for a new certificate well in advance of your purchase.
A complete application must be submitted to the OCP at least 45 days prior to the proposed opening date of the new pharmacy. Without the OCP’s confirmation of approval, the OCP will not activate the new pharmacy, and it will not be permitted to bill third parties. The OCP will take any time necessary to complete their assessment for issuing a new certificate.
Certificate application Process
The application for a new certificate of accreditation must include:
- An Application for Certificate of Accreditation as a Pharmacy;
- An application fee;
- A Director of a Corporation Declaration of Good Character for every pharmacist director of the operating corporation;
- A Pharmacy Self Assessment;
- A copy of the Articles of Incorporation for the operating corporation (only required if the corporation has never operated a pharmacy in Ontario);
- A copy of the share certificates issued for the operating corporation (only required if the corporation has never operated a pharmacy in Ontario);
- A signed copy of the Data License Agreement (DLA) (a copy of the DLA can be downloaded from an OCP registrant’s account under the “DLA” tab); and
- A pharmacy floor plan for OCP approval labelled with several details.
Applications may be submitted by email to pharmacyapplications@ocpinfo.com, faxed to 416-847-8399, or mailed to the OCP to the attention of Pharmacy Applications & Renewals at 483 Huron St, Toronto, ON M5R 2R4.
It is also important to ensure that you file all paperwork required by Ontario Drug Benefits (ODB). Note that the ODB is not open on weekends.
FINANCING & LOANS
Many business buyers finance their purchase with a bank loan. Banks will assess your lease and require that you purchase insurance policies and sign certain agreements.
Lease requirements
Banks will ask you to confirm the proposed location for your pharmacy by providing a copy of the signed lease agreement and the landlord’s consent. Once the purchase is finalized, banks will want your purchase documents to prove your ownership.
Lease duration and clauses
Almost all lending banks will ask for the lease term to be at least 10 years long (either as a single term or an aggregate of terms). However, even with a 10-year term, banks will not provide financing if the lease includes a demolition clause (see “Reviewing the lease” below).
Leasing your purchased property
A bank may require you to form a lease for your purchased property that will govern how your new pharmacy will use the premises – even though you will be your own landlord. The purpose of this lease is for the bank to amortize your loan or protect their stake in your business if you end up selling the property.
Insurance requirements
General liability insurance
Banks mitigate risks from future lawsuits by requiring general liability insurance to cover your legal costs and potential damages.
Fire insurance
Banks often require the amount of fire insurance coverage to be no less than the value of the loan. Fire insurance does not take very long to acquire and it is often included in your property insurance policy.
Life and disability insurance
Generally, lenders want you to have life insurance equal to the amount of the loan, and disability insurance equal to the amount of your monthly loan repayments.
Personal professional liability insurance
The OCP requires that all registrants engaged in the practice of pharmacy maintain personal professional liability insurance coverage.
Under the OCP By-Law, Article 3.1.1, The policy of insurance must contain limits of a minimum of $2,000,000 per claim or per occurrence and $4,000,000 in the annual aggregate. All OCP registrants must provide proof of their insurance upon request of the Registrar.
Additional insurance requirements
Your lender may require you to get additional insurance beyond the above coverage.
Other requirements
To ensure that you do not evade liability by hiding behind your PPC, some lenders will ask that you sign a guarantee stating that you are personally responsible for the PPC’s debts and obligations.
Banks may also ask you to sign a general security agreement (GSA) that gives the bank interest in and recourse to all your assets as collateral for the loan.
MAKING AN OFFER
Finding sellers
Contact pharmacies and brokers to let them know you are in the market to purchase. A pharmacy might host an open house to allow prospective buyers to view the premises.
It is best to research the target pharmacy by reading the appraisal, knowing the practice’s basic metrics, and preparing follow-up questions with your team. You may have to sign a confidentiality agreement before you can view the appraisal.
Asking the right questions
Ask compelling questions to the seller that reveal their answers to important questions.
- Why do they want to sell? Knowing their key interests behind the sale can reveal which terms of the deal may be more flexible in negotiations.
- Does the seller own multiple pharmacies? If you are interested in owning multiple practices, then presenting a credible offer to the seller could make them consider you for another pharmacy in the future.
- What is included in the sale? The seller might also be offering the property which hosts the pharmacy. If the seller is offering the property of a strip plaza or condo, see if the lease allows for expansion.
Evaluating the pharmacy
Acquiring a professional appraisal
It is best to obtain a professionally prepared appraisal for the pharmacy you are interested in buying. Appraisals provided by the seller are biased toward their interests, so it is important to seek a second evaluation.
Lending banks may also require an independent appraisal to fund your purchase or approve your loan.
THE BUYING PROCESS
(1) Letter of Intent
Submitting and negotiating a letter of intent ensures that you and the seller are on the same page about the terms of the deal. The letter of intent structures the framework of the deal.
A letter of intent needs to answer key questions.
- Is bank financing involved?
- Will there be a chartered accountant audit?
- Will any staff be terminated?
- Are there leaseholds?
- Is HST included in the purchase price?
- Are there confidentiality requirements?
- Are there non-competition and non-solicitation terms?
If buying through a corporation with multiple shareholders, then the letter of intent should include a draft shareholders agreement. If buying through a partnership, then the letter of intent should include a draft partnership agreement.
(2) Due Diligence
After the letter of intent, the seller’s business and financial documents need to be investigated and reviewed to ensure that the pharmacy is what is represented to you and aligns with your interests.
All important information needs to be up-to-date and verified.
You also need to know if the practice is financially sound and what liabilities you are taking over It is also helpful to meet with key employees to ascertain the state of the seller’s pharmacy.
You should especially watch out for regulatory violations, company liabilities, and compliance issues with government departments (e.g., CRA or the Workers’ Compensation Board).
Reviewing the lease
The quality of the lease plays a significant role in the purchase price. Landlords may demand guarantees, conditions, and compensation for their consent to transfer the lease. The lease and the landlord’s conditions should be reviewed 1-3 years in advance of the sale.
Review your lease to assess how its terms and clauses could affect the value of the pharmacy and your ability to secure financing. There are several kinds of problematic clauses.
- Demolition clauses allow the landlord to end the lease and remove the pharmacist if the landlord decide to demolish or tear down the building. Banks will almost never tolerate a demolition clause to finance a loan for a buyer.
- A lack of renewal terms also makes it harder for you to secure financing because most banks require the lease to have at least a 10-year term.
- Assignment clauses determine how leases are transferred in a sale. These clauses can be a problem if they require difficult assignment conditions.
- Relocation clauses allow the landlord to move a pharmacy to another location on the premises. Relocations can disrupt your business and add unanticipated costs.
Termination clauses give the landlord the right to terminate the lease when the seller tries to sell the pharmacy.
For buyers, the best leases have a low and fixed rent for at least a 10-year term, favorable 5-year renewal options, no demolition or relocation clauses, and easy transferability.
(3) The Final Agreement
The purchase agreement outlines the terms of agreement between the parties of the deal. The final agreement will detail what is expected of each party including:
- The purchase price and form of payment;
- Any necessary price adjustments;
- Any escrow requirements
- Any earnout provisions; and
- Any third party approval required to complete the purchase.
Representations and Warranties
The agreement will include representations and warranties related to the seller’s pharmacy and business operations. Some important representations are that:
- All pharmacy assets are in good working order;
- Financial records are accurate and not fraudulent;
- The incorporated seller has the authority to sell the shares or assets;
- All taxes have been paid up to the purchase; and
- All applicable laws have been followed by the pharmacy.
If you are not satisfied with the seller’s decision to not make or qualify certain statements, you could use this to negotiate the purchase price. You may negotiate to include one or more conditions in the agreement that must be satisfied for the deal to
close. It is important to draft any conditions clearly and concisely.
Multiple closings
There will usually be separate purchase and sale agreements for the seller’s assets and property respectively.
HST considerations
Agreement on whether HST is included in the purchase price or not can affect the deal by thousands of dollars. And not specifying who will pay HST can result in conflict between you and the seller. Review the price allocation and determine exactly how much HST will be payable upon closing.
(4) Closing Documents
There are various closing documents that give effect to the transaction depending on whether it involves an asset or share purchase agreement. You should negotiate for other contracts or covenants to increase the value and security of your purchased practice.
Pre-closing covenants
Pre-closing covenants are promises for the seller to do or not do something to ensure that you receive the purchased pharmacy without any changes up until closing. Negative covenants prevent sellers from making changes to the pharmacy without first receiving the buyer’s consent. Positive covenants obligate sellers to take certain actions before closing.
Restrictive covenants
You want to ensure that adequate restrictions are placed on the seller to protect your interests. Restrictive covenants limit the seller’s ability to
compete and solicit your new customers and employees.
For example, you should have the seller sign a non-competition covenant that limits their ability to operate a pharmacy for a period of time following the sale. You should also consider geographic restrictions on where they can practice after the sale and a predetermined amount of money damages should they regain a patient from their sold practice.
Employee agreements
It is best if the seller’s employees are under contracts to ensure that liability is limited and termination terms are clear. Employee contracts should indicate how much notice (in time or payment) must be given to an employee in the event of termination. Note if the notice clauses are limited to the Ontario Employment Standards Act minimums or if the common law’s extended notice standard applies.
If the seller has many employees not under contract, then you could negotiate to have the seller (1) put all the employees under contract, (2) absorb the employee liability for termination after the sale closed, or (3) lower the purchase price.
CONCLUSION
Canada’s pharmacy market presents a valuable opportunity. With proper planning and guidance, you can buy a pharmacy for the right price and plan the next stage of your professional life.
The contents of this article are not to be construed as legal advice. Contact Emerge Law’s lawyers for legal assistance.