fundamentals and pitfalls of buying and selling a pharmacy greg reybold, j.d
TRANSCRIPT
FUNDAMENTALS AND PITFALLS OF BUYING
AND SELLING A PHARMACY
GREG REYBOLD, J.D .
LEARNING OBJECTIVES
•Understand the differences between asset sales/purchases and stock sale/purchases and considerations specific to pharmacy industry
•Prepare and respond to a letter of intent and negotiate an exclusivity period
•Identify and disclose potential red flags through appropriate due diligence including but not limited to financial malfeasance, contractual issues, employment issues, as well as pharmacy specific issues including licensing matters, federal and state compliance issues, malpractice and care issues, and potential audit liability
•Understand the protections available to buyers and sellers through contingencies, conditions precedent, indemnities, disclosures, representations, warranties, non-competes, and holdbacks
DISCLOSUREI DO NOT have (nor does any immediate family member have) actual or potential conflict of interest, within the last twelve months, a vested interest in or affiliation with any corporate organization offering financial support or grant monies for this continuing education activity, or any affiliation with an organization whose philosophy could potentially bias my presentation.
Attending this presentation, or using the information it contains does not create an attorney-client relationship. No information provided should be construed to constitute legal advice. If you have questions about these or other legal issues please contact an attorney.
STOCK SALE VS. ASSET SALE
STOCK SALE•Purchase of owner’s share of a corporation {or membership interest}
•Typically preferred by sellers
•Tax considerations, liability often goes with the company and cleaner
ASSET SALE•Purchase of all or substantially all assets
•Typically preferred by buyers
•Tax considerations, and liability considerations (take the good and leave the bad)
Stock vs Asset – Pharmacy Specific Considerations
•All situations are different but there are considerations unique to pharmacy
•Significant potential liabilities including recoupments, compliance which can implicate civil and criminal, contracts and licenses that may or may not be assignable
•While liabilities can be limited – liabilities will remain even for buyers in asset purchase and sellers in stock purchase
STOCK VS ASSET – PHARMACY SPECIFIC
CONSIDERATIONS CONTINUED…
EXAMPLE – MedicaidAny person or entity that is a Medicaid/PeachCare for Kids provider, and any person or entity that replaces a provider, shall be deemed to have accepted joint and several liability, along with its predecessor, for any overpayment and/or provider fee sought to be recovered by the Division after the effective date of the successor provider’s enrollment, regardless of the successor’s enrollment status or lack of affiliation with its predecessor at the time the overpayment was made. Sec. 601.4 DCH Policies and Procedures for Pharmacy Services.
PRE-NEGOTIATIONS SELLERS
•Exit strategy? Have you planned for your sale?
•Valuation?
•Business in order? Corporate formalities/compliance
•Marketing
PURCHASERS•What can you afford?
•Financing?
•Valuation?
RELATIONSHIP
•Negotiations can occur organically•Employer/employee; mentor/mentee•Arms length/formal•Cold calls
RELATIONSHIPS CONTINUED…
Regardless of relationship following the proper steps is in the best interest of both parties… 1. Letter of Interest 2. Due Diligence 3. Purchase Agreement
LETTER OF
INTEREST
•Non-binding
•Summary of key terms of proposed transaction
•Type of purchase; if asset – assets to be acquired {r/e involved}
•Contemplated purchase price
•Treatment of inventory/accounts receivable
•Non-disclosure/confidentiality
•Holdbacks
•Due diligence
•Restrictive covenants
•Contingencies
•Exclusivity
•See handout
RESPONDING TO LETTER OF INTEREST
•Can agree to exclusivity without agreeing to other terms – non-binding
•Depending on contents may want to respond to help shape negotiations
•Assets to be retained; different type of sale, price, restrictive covenants
DUE DILIGENCE•Like buying a house – leave no stone unturned – inspection of premises, inspection of title, warranties {are you getting what you think you are getting}
•Like selling a house – you want to make appropriate disclosures and avoid making misrepresentations
•Purchaser uncovers risks and liabilities & Seller discloses the same
Corporate organization/capital structure•Certificates of organization, bylaws, operating agreements, shareholder agreements
•Ownership table, loans, stock transfer and ownership records, stock option agreements
•List of affiliates, parents, subs
DUE DILIGENCE CONTINUED…
Employee info/benefits•Employee or independent contractor – misclassifications issues
•Work schedule/pay – overtime issues
•Benefit plans
•Employee agreements, handbooks
•Workers comp claims, unemployment claims, employee complaints, suits or disputes
DUE DILIGENCE CONTINUED…
Litigations•Prior, pending, threatened litigations
•Judgments
Commercial Contracts•Wholesalers
•PBMs
•Leases
•Loans
•Other
DUE DILIGENCE CONTINUED…
Real Property•All property owned with corresponding deed and mortgages, tax liens, ucc liens, judgments
•Copies of all real property leases and subleases
•Mortgages
•Certificates of occupancy
•Licenses and permits to operate the Company facilities
•Zoning notices, violations
DUE DILIGENCE CONTINUED…
Equipment and Personal Property•All equipment
•All software/licenses
•Automobiles
DUE DILIGE
NCE
•GDNA inspection reports
•Leases
•Business Associate Agreements
•Prescriptions {controlled substances}
•Marketing activities
•Claim submissions
•Compounding
•Vaccine administration – proper policies & procedures, require protocol agreements
•Referral agreements – kickback/stark
•HIPAA compliance {notice of privacy practices, software security rule, storage of PHI}
COMPLIANCE
DUE DILIGENCE CONTINUED…
OTHER•Financial records going back at least five years
•Licenses/permits {EIN, Medicare, Medicaid, DEA, NPI}
•PBM agreements
•Liability insurance policies/claims
•All financing
•Tax issues
Why do you want to look at leases?• When does it expire, is it assignable, is there a right to
renew?• Is it HIPAA compliant – landlord right of entry issues• Does it contemplate referrals {ex. Landlord is physician or
vice versa} does it implicate kickback or stark?
Is Due Diligence Necessary if You Are Looking to do an Asset Purchase?
YES!May affect your decision to purchase, some liabilities carry over and you need to know what to fix/change.
PURCHASE AGREEMENT
•Description of transaction•What’s included•Purchase price•Restrictive covenants/employment•Closing
PURCHASE AGREEMENT CONTINUED…
Representation and Warranties•Provide assurances – both parties
•Chance for Seller to disclose through use of Schedules
•Discussion: What types of representations and warranties would you want as a purchaser in an asset purchase? As a seller?
•See Handout
PURCHASE AGREEMENT CONTINUED…
Conditions Precedent•The obligation of Seller and Purchaser to consummate the transactions contemplated by Agreement are subject to the satisfaction of certain conditions?
•Discussion: What types of conditions should Purchaser want satisfied prior to close of an asset purchase? As a Seller?
•See handout
PURCHASE AGREEMENT CONTINUED…
Holdback – Can help protect against foreseen and unforeseen liabilities•Example: Tax liability, audit liability•Escrow
PURCHASE AGREEMENT CONTINUED…
Indemnifications•Protect buyer from pre-transaction liability•Protect seller from post-transaction liability•See handout
Other Considerations
•Real Estate – May require separate transaction•Marketing of securities, state and federal implications, material disclosures•Logistics – inventory – licensing/inspection – power of attorney for contacts
Discussion/QuestionsDoes an asset purchase eliminate all previous liabilities for a purchaser?
NO
If you a purchasing a pharmacy, can you operate under the previous pharmacy owner’s Georgia license number?
NO
If you worked in a pharmacy for a number of years should you forego due diligence?
NO. Thorough due diligence can uncover any number of potential liabilities and sometimes the sellers themselves are surprised about liabilities uncovered.
If you are selling your pharmacy to a chain, do you have to agree to their proposed terms including restrictive covenant agreements?
No, anything you are not comfortable with should be negotiated. Chain contracts can be very one-sided and attention to detail is key.
COMMENTS/QUESTIONS?
