Most of my blogs to date have been about preparing yourself to buy into a pharmacy. Of course, during this time, you are excited and anxious and ready to hit the ground running in your new business, your family is pumped and ready to support you BUT what if tragedy struck?
· Have you ever thought of what would happen to your interest in your pharmacy business if you suddenly died or became permanently disabled?
· Does your family know what will happen to your share in the pharmacy?
· Have you ever wondered what would happen if either of these sudden events happened to your business partner?
· Could you afford to buy their interest out?
· Have you and your business partners agreed on the procedure to be followed if a partner wishes to exit the business or retire?
Regardless of whether you operate in a partnership, a trust, a company or a combination of these, the partners in the business need to have a business succession strategy documented either in a partnership agreement or a shareholder’s agreement that deals with the following matters:
· death,
· total disability,
· bankruptcy or
· retirement
The death or permanent disability of a partner:
The Pharmacy Act 2010 (WA) states that upon the death of a pharmacist, their personal legal representative can carry on the pharmacy business for twelve months or longer as agreed in writing with the Pharmacy Registration Board of Western Australia. This means that the executor will need to sell the deceased pharmacist’s interest in the business quite quickly.
Whilst 12 months seems like a long time, in most cases the family will usually push for an earlier settlement. The pressure of settling a sale creates a few issues for the remaining partner, these include:
· Do they want to and are they able to buy out the interest of the departing partner?
· If so, how are the remaining partners going to fund a purchase of the departing partner’s interest?
· How is the value to be determined to ensure a fair and equitable outcome for all parties?
To mitigate these issues, a business succession strategy should provide for the business to take out death and permanent disability insurance (for all partners) with sufficient coverage to allow the remaining partners to buy out the departing partner’s interest using the proceeds of the insurance.
The level of insurance should be reviewed annually and should consider:
Any changes in value of the business;
loans from the partners to the business; and
further amounts required to stay within the business to cope with the loss of the partner.
The exiting or bankruptcy of a partner:
It is essential that the shareholders agreement or partnership agreement sets out the process to deal with the interest of a partner who wishes to exit the business or one who becomes bankrupt.
It is important to note here that unless the partnership agreement specifies that the partnership will continue when a party becomes bankrupt, then the partnership will be automatically dissolved
It is common practice that should any of these events occur, the remaining partner should be given an option to purchase the interest of the departing or bankrupt partner prior to the interest being offered to a third party.
A primary issue to be agreed upon is the method for valuing the business. Once the value has been determined, the parties will negotiate whether a discount should be applied to the market value particularly where the departing partner was critical to the business.
Method of payment is another key consideration in these circumstances:
· will the purchase price be paid in full on settlement or
· will there be a deferred payment plan in place?
The retirement of a partner:
In relation to older partners, they’ve put in the hard yards over the years and there needs to be a process in documented to allow them to divest their interest in the pharmacy.
The strategy should, subject to all the parties agreeing, consider the following strategies:
· outright exit at a certain age or other trigger event or
· a phased exit over a period of say 5 years (earnout arrangement could work here)
Consideration should be given to situations where the older partners are ready to exit, however the younger partner is unable to finance an outright exit. In this instance an “earnout” type of arrangement could be considered. Essentially this will allow the exiting partner to reduce their interest and activity in the business over time; any profit distributions received will be proportionate to their ownership interest.
Where to next?
If this blog has sparked your interest, then the first thing you need to do is talk to your partners (both life and business partners). It is critical in my view that your life partner and the person nominated to be your executor understand how the succession documents will be affected in the case of death or permanent. Then a discussion with your business partners and lawyer should be initiated to get the ball rolling on this very important planning point.