INTRODUCTION
Canada’s pharmacy market is comprised of roughly 14,000 pharmacies with a combined value of $47 billion. The attractive profits from this market present an opportunity to sell a pharmacy at an attractive value.
This guide will help you understand how to assess an offer, incorporate your pharmacy business for sale, and navigate the selling process to make a strategic sale.
PLANNING FOR POST-SALE
To sell your pharmacy at the right time and for the right price, you should plan what you want your professional life to look like following the sale. Do you want to fully retire, reduce your work hours, or continue working in another business?
If you are planning on moving to another business venture, 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 sell the pharmacy through an asset purchase or share purchase arrangement. Each purchase structure has its own advantages and disadvantages.
Asset Purchase
Selling a pharmacy through an asset purchase means that the buyer will purchase the assets of the business instead of the business as a whole. The assets you sell could include equipment, inventory, goodwill, customer lists, cash, and real estate. Note that you will retain control of the business as a legal entity.
Advantages
One buyer benefit of acquiring a pharmacy through an asset purchase is that they will not acquire your company’s liabilities or obligations. Because the buyer is only acquiring the business’ assets, any negative history of your pharmacy will not attach to their name.
You may also be able to sell your pharmacy’s goodwill in a way that allows the buyer to reduce their taxes. Goodwill is an intangible asset that can be created if they pay more than the agreed-upon value of the purchased assets. Goodwill is eligible capital property that could be written off their taxes. You could offer to sell your goodwill at a certain price to negotiate for other terms from the buyer.
Buyers 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, especially for the buyer. For example, the buyer will need to dedicate effort to negotiating new supplier contracts to ensure that the pharmacy receives the inventory and equipment it needs to continue operating.
The buyer may also have to acquire a new lease to buy the real estate and a new line of credit to fund the purchase. Moreover, the buyer will need to apply for a new Ontario Drug Benefit (ODB) 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 sell your pharmacy as a whole by selling the shares in the business. Consequently, the buyer will become the owner of the legal entity under which your business operates.
Advantages
Share purchases are often less complex compared to asset purchases because new leases and lines of credit do not need to be negotiated. Additionally, the buyer can also save time by using your existing employment agreements and ODB number.
There may also be tax benefits with a share purchase. For example, the buyer might be able to apply your pharmacy’s losses against their taxable income to lower their payable taxes.
Sellers generally prefer share purchases because they are simpler.
Disadvantages
Share purchases do not allow buyers to benefit from the goodwill tax deduction that is possible in an asset purchase.
The liabilities and obligations of the pharmacy will attach to the buyer’s name because they become the legal owner of the business. Consequently, the buyer may ask for more information to learn about your pharmacy’s past business practices to understand what negative history they might be taking on.
WHAT BUYERS LOOK FOR
Financials
The true earnings of the pharmacy is one of the most important factors in the decision to buy.
Generally, buyers will want to see a practice operating at 40% profitability. You should have easy-to-read financial information available on your pharmacy for the last 3 – 5 years.
The buyer’s accountant may assess your financial records, including tax returns, balance sheets, and profit and loss statements.
Additionally, the buyer might assess key business information about your pharmacy that could reveal its long-term profitability such as:
- Inventory count;
- Refill rates;
- New fill rates;
- Average script prices; and
- Top 100 drug sales.
Location
Buyers prefer pharmacies located close to a doctor’s office and major retail outlets. They will also 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, buyers may note the location of other pharmacies in the surrounding area. Few nearby competing stores could lead to more sustainable business growth.
Reviewing your lease
Many business buyers finance their purchase with a bank loan. Banks will assess your lease and require the buyer to purchase insurance policies and sign certain agreements. Banks will also ask buyers to confirm the location of your pharmacy by providing a copy of the signed lease agreement and the landlord’s consent.
The terms of your lease may affect your buyer’s ability to secure a loan to purchase your pharmacy. The quality of the lease also plays a significant role in the purchase price.
Lease duration
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 below).
Lease clauses
Review your lease to assess how its terms and clauses could affect the value of the pharmacy and your buyer’s 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 decides 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 a buyer 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 business and add unanticipated costs.
- Termination clauses give the landlord the right to terminate the lease when you try to sell the pharmacy.
Buyers will look for leases that 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.
Evaluating the pharmacy
Evaluating the value of your pharmacy before putting it on the market can help give you an idea of the price range that you can expect.
Acquiring a professional appraisal
It is best to obtain a professionally prepared appraisal for the pharmacy you are interested in selling. Appraisals provided by the buyer are biased toward their interests, so it is important to seek a second evaluation.
Lending banks may also require the buyer to obtain an independent appraisal.
FRANCHISE ISSUES
The buyer will want to know whether you operate your pharmacy independently or as a part of a franchise.
Independent pharmacies
If you operate as an independent owner, without any affiliation to a brand owned by another corporation, then you control 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. Have copies of any banner agreements ready for the buyer and your legal team to assess.
As a selling owner, you would have the authority to sell 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. Have copies of any franchise agreements ready for the buyer and your legal team to assess.
As a seller, you need to consult your franchise agreement to note any conditions the franchisor has placed on your ability to sell the pharmacy. For example, the franchisor might require you to give a certain amount of notice and to receive their consent to sell.
INCORPORATING TO SELL
The buyer might require you to incorporate your pharmacy before selling to buy the business through a share purchase and use corporate tax-saving opportunities.
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 for buyers to consider.
Tax benefits of incorporation
Lifetime capital gains exemption
If a buyer purchases the shares of your pharmacy as a PPC and later sell any of its shares, they may be able to use their lifetime capital gains exemption (LCGE) to reduce the 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 PPC’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. 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 the pharmacy. The buyer might want to incorporate your pharmacy as a PPC to sell and purchase shares and 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
A PPC must have a certificate of authorization from the OCP to operate as a pharmacy. The buyer will want to check that you have a valid certificate of authorization to ensure that your 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 for the buyer to buy the shares from your pharmacy. Alternatively, you will enter into an asset purchase agreement to have the buyer acquire the assets of your pharmacy.
(5) Amalgamate the two corporations
When you and the buyer have a PPC, their corporation will purchase your PPC’s shares. This involves an amalgamation (or joining) of the two corporations into one new PPC. The buyer’s 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
The buyer should apply for a new certificate well in advance of your sale.
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 file all paperwork required by Ontario Drug Benefits (ODB). Note that the ODB is not open on weekends.
ASSESSING AN OFFER
Finding buyers
Contact brokers to let them know that your pharmacy is on the market. Consider hosting an open house at your pharmacy to allow prospective buyers to view the premises.
The buyer may ask to see your appraisal and ask for some of your basic metrics. Prepare for questions from buyers with your team. Additionally, have prospective buyers sign a confidentiality agreement before they can view the appraisal or other sensitive documents.
Answering questions
Be prepared to answer questions from the buyer about your pharmacy such as the following:
- Why do you want to sell? Take the time to reflect on your key interests behind selling. Talk with your lawyer to strategically plan what to mention in negotiations.
- Do you own multiple pharmacies? If you own multiple pharmacies, then a buyer may be interested in establishing a long-term relationship to purchase the other businesses in the future.
- What is included in the sale? The buyer may want to know if you are offering the property with the sale. They might also check to see if you lease offers expansion potential.
THE SELLING PROCESS
(1) Letter of Intent
A prospective buyer will send you a letter of intent. Reviewing the letter with your team and negotiating the terms with the prospective buyer ensures that you and the buyer 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 the buyer is purchasing through a corporation with multiple shareholders, then the letter of intent may include a draft shareholders agreement. If they are buying through a partnership, then the letter of intent may include a draft partnership agreement.
(2) Due Diligence
After the letter of intent, the buyer will investigate your business and financial documents to ensure that the pharmacy is what is represented to them. All important information needs to be up-to-date and verified.
The buyer will also inquire into whether your pharmacy is financially sound and what liabilities are attached to it. They may also interview your employees to learn more about your business.
A detailed review of your lease will also take place at the due diligence stge.
The buyer may also ask about any regulatory violations and compliance issues with government departments (e.g., CRA or the Workers’ Compensation Board).
(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 your pharmacy and business operations. Some important representations are that:
- All pharmacy assets are in good working order;
- Financial records are accurate and not fraudulent;
- You have 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 the buyer is not satisfied with your decision to make or qualify certain statements, they could use this to negotiate the purchase price. They 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 your 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 buyer. 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.
Pre-closing covenants
Pre-closing covenants are promises you make to do or not do something to ensure that the buyer receives the pharmacy without any changes up until closing. Negative covenants prevent you from making changes to the pharmacy without first receiving the buyer’s consent. Positive covenants obligate you to take certain actions before closing.
Restrictive covenants
The buyer will want to ensure that adequate restrictions are placed on you to protect their interests. Restrictive covenants limit your ability to compete and solicit your old customers and employees.
For example, you may have to sign a non-competition covenant that limits your ability to operate a pharmacy for a period of time following the sale. There may also be geographic restrictions on where you can practice after the sale and a predetermined amount of money damages should you regain a customer from your sold practice.
Employee agreements
The buyer will want your employees to be 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 on your employment agreements are limited to the Ontario Employment Standards Act minimums or if the common law’s extended notice standard applies.
If you have many employees not under contract, then the buyer could negotiate to have you (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 sell your 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.