With a strong common vision for success, many pharmacists will enter a business partnership with trusted friends or colleagues. In many cases, the pharmacy will run smoothly and the owners will simply agree on the many decisions to be made in the day to day running of the business.
But what happens if conflicts arise, circumstances change, or when it’s time for the partnership to end?
This is the focus of the business session Meridian Lawyers’ Principal Georgina Odell and 542 Partners’ Director Stuart Brandman will explore at Pharmacy Connect 2024 in Sydney on Friday 6 September.
What follows is a snapshot of the essential elements to consider before entering any pharmacy partnership or shareholder agreement.
Plan, plan and plan some more!
We highly recommend that intended business partners take their time to openly discuss, plan, and document the actions, processes, and contingencies they believe should take place during the life of the pharmacy business.
This may include agreeing to regular planning meetings to prepare for the year ahead, in addition to determining the contribution each partner will make to the pharmacy, and clarifying the consequences if one partner defaults on their obligations. Common scenarios that are essential to consider include agreeing the action required if a pharmacy partner has his/her registration suspended or cancelled.
Voting rights
A well drafted agreement should outline the voting rights of each partner, and determine whether certain business decisions must be made unanimously (such as the termination or appointment of staff, or extending lines of credit) notwithstanding any differing voting rights or ownership.
Finance and spending limits
The agreement should cover spending limits that require unanimous agreement, and establish processes for access to and authorisation of payments. Rules about a partner’s ability to transfer his or her business interest to a third party, and whether that partner must first offer the business interest to the continuing partner also need to be acknowledged in the agreement.
Agreement breaches
The agreement may also define what is considered to be a default on the part of a partner (for example a breach of the agreement, acquiring an interest in a competitor business, insolvency, certain criminal offences, or loss of registration as a pharmacist). The agreement may also contain provisions giving a non-defaulting partner an option to buy out the business interests of the defaulting partner and exit them from the business.
When circumstances change
Over time during any partnership, circumstances will inevitably change. The agreement should contain rules to address these changes in circumstances – for example, what is to happen if a partner wishes to retire, or becomes totally and permanently disabled, or dies? Does an ongoing partner wish to have the right to buy out the exiting pharmacist’s interest in the business?
Valuation, insurance and buy/sell agreements
A well crafted agreement will also contain an agreed valuation methodology to use where an exiting partner’s interest is to be purchased by an ongoing partner. Often, in pharmacy businesses, this requires an external valuation service to address the specialised nature of pharmacy and to ensure the most accurate assessment is made.
In addressing potential funding considerations for the unexpected illness or death of a partner, one pathway that is often implemented is to insure each partner’s equity value under a life or TPD insurance policy.
This addresses the course of action when unexpected events occur, and ensures there is sufficient funding to allow the partner (or their surviving beneficiaries) to access to the value of their equity, without the need for either the business or surviving partner(s) to have to finance this payment.
Typically, a partnership or shareholders agreement in this scenario will reference a “buy/sell” agreement, which in turn is backed by insurance. It is important that shareholders’ agreements give proper reference to a buy/sell agreement and the buy/sell agreement be backed by insurance where deemed appropriate by the parties.
Competitive clauses
Partners may wish to include a clause which restrains the parties from being interested in a competitive business during the life of the business and/or for a period of time after a partner exits the business.
Handling disputes
A good agreement should also contain a dispute resolution mechanism, ideally requiring that in the event of a dispute, a party must mediate before commencing legal proceedings against the other.
When a pharmacist consults Meridian Lawyers regarding a business dispute, our first question will always be to determine whether there is a signed partnership or shareholders’ agreement in place, which may provide a useful framework for resolving the problem.
What if there is no agreement?
It is never too late to negotiate and enter into a binding partnership or shareholder agreement. However, we recommend that it be done before acquiring the pharmacy interest so there is a shared understanding and agreement about these issues from the commencement of the joint venture.
This article was written by Principal Georgina Odell of Meridian Lawyers and Director Stuart Brandman of 542 Partners.
Interested in attending Pharmacy Connect 2024?
Georgina and Stuart will be presenting their session: Starting & Finishing Strong – structuring your pharmacy business for financial, tax and legal success in Sydney on Friday 6 September 2024. Click here to learn more.
Seeking legal advice?
In addition to providing specialist advice about buying or selling a pharmacy, our team of pharmacy lawyers regularly advises clients about their obligations in employing and managing staff, franchising, privacy, obtaining finance, partnership arrangements, dispute resolution, retail leases and Pharmacy Location Rule. Click here to find out more.
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