Are you planning to retire in the next five years? Whilst planning for retirement shouldn’t be a complicated stage in your life (it’s the time when you can finally take a long-earned rest), as a pharmacist it may not be as simple as you think. Careful planning may be needed years before this big milestone is reached. The team at Debenhams Ottaway, one of NPA’s trusted legal partners guides you through what you need to think about in this blog.
Whether you decide to hand the keys to the next in line for the family business, or you decide as a family to sell your pharmacy to a qualified buyer, there are some practical, financial and legal considerations to factor in to ensure a smooth transition.
And even if you aren’t planning to retire in the near future, you should think about planning ahead in case the worst should happen as making arrangements for the death of a business owner is often neglected.
I’m passing my pharmacy down to the next generation, what do I need to think about?
Whether you are preparing to retire or planning ahead in case the worst should happen, succession planning should form a key part of your business strategy and the preparation of a well thought out Will is essential.
It is important to consider who you want to benefit from your business as there could be competing interests of family members, particularly those who have taken a more active role than others. This could be avoided with a considered approach to succession planning. Deciding who in your family to leave the business assets to could also have tax implications. Leaving assets to your spouse will ensure that the assets pass free of Inheritance Tax, however, the current generous Business Property Relief that may be available to you on death is lost.
Under the current rules, a properly drafted Will can provide for all assets qualifying for Business Property Relief to pass, for example, into a discretionary trust or to chargeable beneficiaries such as the business owner’s children taking advantage of this generous relief at the earliest stage.
When drafting your Will, you should also think about putting in place Lasting Powers of Attorney (LPA). Creating and registering an LPA allows you to appoint someone you trust to make decisions on your behalf if you lose capacity, such as after an accident or if you become ill. They are even more important when you own a business. Without one, your loved ones may face lengthy legal processes, such as applying to the court for deputyship, which can be costly and can be distressing. And if you are the sole signatory on the bank mandate and you lose capacity, your employees and suppliers may not be paid.
A shareholders’ agreement or cross-option agreement – just as important as writing a Will
Another succession planning step which is just as important as a Will, is to consider your legal structure and what agreement you need to regulate your interests. For instance, a partnership or LLP should have a partnership agreement, or if you operate via a limited company you might need, or should have if there is more than one stakeholder, a shareholders’ agreement. Each should govern what happens when a shareholder dies or wants to exit the venture.
Some shareholders’ agreements set out that a business partner has the option to buy your shares on death. This helps to ensure that a shareholder’s family benefit from and inherit the value in the business but it would keep the shares in the hands of those operating the business.
A shareholders’ agreement can be supplemented by a cross-option agreement. It can often be difficult for small to medium sized businesses to raise sufficient capital to ‘buy out’ a deceased shareholder. A cross-option agreement backed by life insurance can mean that funds are available immediately to buy out the deceased’s shares. If structured properly, it can also ensure that the shares qualify for Business Property Relief with the proceeds of the life policy falling outside the estate and not subject to Inheritance Tax, under the current rules. Your financial or tax adviser can help with cross-option policies, which should be tailored by a solicitor to your circumstance and dovetail with any shareholders’ agreement and your Will.
My family don’t want to run my pharmacy business, I need an exit strategy
Selling your business is usually the culmination of many years of hard work and investment so it’s not an easy decision to make, especially if you can’t keep the business in the family.
There are several steps involved in preparing to sell to get the best value for your business and to help ensure a smooth transaction. Having the right team working with you from the outset will make all the difference when it comes to getting fast, straightforward legal and professional advice, allowing you to remain focused on the business.
The NPA’s trusted partners includes pharmacy brokers that can help you market your business for sale. You will need to discuss with your business accountant/tax adviser to structure the exit and you should use a solicitor, such as Debenhams Ottaway, with experience of disposing of pharmacy businesses – a business sale is different to the sale of a property and is considerably more involved.
Whether you are selling the assets of your pharmacy business or your shares in the company, the key stages involved in purchasing a business are usually:
Initial agreement: The total price the buyer is willing to pay for the business will be key to you reaching an agreement in the first place. You may need to be flexible about when you receive that sum rather than assuming you will receive the whole sum on completion. The buyer may insist on making instalment payments to better manage their cash flow or want to hold back monies whilst they check that the promises you have made about the business are correct. Typically, there may be a completion accounts adjustment and stock take on the day of completion.
A non-binding agreement (called ‘heads of terms’) is often drawn up once an initial agreement is reached. The document must clearly state that it is non-binding on both you and the buyer and that any deal remains subject to you agreeing the terms of a purchase agreement. Bear in mind that the more complicated the payment structure, the more you may end up paying in legal and accountancy fees so you should discuss with a solicitor the legal issues with instalment/contingent payments, and whether security is needed for the same, prior to agreeing the heads of terms with the buyer or broker/agent.
Due diligence: The buyer will want to check that the price they have agreed is reflected in the value of the business you are about to sell. Reviewing the records/books, contracts, employees, assets and property of the business will be key in determining if they want to return to the negotiating table and demand a reduced price or indemnities for identified issues. If you are thinking of selling in the next five years, you should consult with a solicitor early on to see if any issues can be addressed before marketing for sale to maximise the sale value.
Purchase agreement: The purchase agreement is the most important document in any transaction and sets out the promises you will give for the business being sold. If you are unable to stand behind the warranties/promises requested by the buyer, you will need to supply a separate letter (known as a ‘disclosure letter’) setting out where the promises cannot be met or are inaccurate. If you have informed the buyer in a disclosure letter of inconsistencies with the promises given in the purchase agreement, the buyer will not be able to later sue you for breach of contract. The more detailed and accurate your disclosure letter, the better chance you have of avoiding a claim to pay back some of the purchase price.
Succession planning for a pharmacy involves several different factors and should always be undertaken in good time and in consultation with your solicitor, broker, accountant and financial adviser to ensure the best result for the business and your family.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.