Reasons for Buy-Sell Agreements

Reasons Why Pharmacy Co-Owners Need a Buy-Sell Agreement

Two or more people can own a pharmacy and operate the business as a partnership, Sub-S Corp, C-Corp, or an LLC. Which ever legal structure they choose, the pharmacy owners have a common interest in serving their customers, and generating a profit. The working relationship between co-owners/partners may work well and last for years. However, just like many marriages, business relationships can reach a point where they end, and this is a reason why pharmacy owners who have partners need a Buy-Sell Agreement.

If it happens with families can it happen with business partners?

We have all heard stories about someone who has died. The person did not leave a legal Will or provide any directions as to what should be done should the time ever come – which it does for all of us. Due to the lack of planning, family members who had always been cordial to each other, become heated rivals as they fight over the deceased persons assets.

Thinking ahead and planning are always good things.

When people decide to operate a pharmacy together they need to make a legal plan as to what will happen when one partner dies, retires, or they can no longer tolerate being around the other partner. Due to the lack of planning, when a partnership is coming to an end the parties may find them selves spending money on attorneys and court costs instead of investing in their business. Partnerships can end in a ugly divorce just as some marriages do.

Don’t be surprised when failing to plan leads to failure.

Recently a pharmacy partnership that had not created a Buy-Sell Agreement got to the stage in the relationship the two partners could no longer even speak to each other. All communication was done through lawyers. They set up the pharmacy to generate a profit, but now how much of the business profit has to be funneled into the pockets of two different attorneys?

One partner who was willing to buyout the second partner decided to get a pharmacy valuation done without the other knowing, or contributing to the process. The value was considerably lower than expected. The second partner, who was to be bought out, asked what information was provided for the pharmacy business valuation, but neither the partner nor the valuation company would state what numbers and documents were analyzed to come to that conclusion. In the event the first partner had provided skewed numbers, in order to protect himself the second partner decided to have a second pharmacy business valuation completed by a second company.

Unfortunately the valuations had differing results and the difference was hundreds of thousands dollars. With neither party talking to each other this was only fuel for the attorneys to continue racking up fees.

As the fight drags on the business profits are no longer the main purpose in the partners lives. It may take years and many more dollars before a judge has the final say.

In a similar situation one partner hired a firm to calculate a business value. The second partner was agreeable, but was not involved in picking the valuation firm. The valuation firm had very reasonable rates, but had no expertise in pharmacy. There are many very good valuation firms out there and we are not demeaning any of them. However, there has been many changes in the pharmacy industry and some of the standard methods of valuing a business just doesn’t hold water for the pharmacy industry. A company with hands-on experience and current knowledge of what pharmacies are actually selling for will have a better handle on a pharmacy’s value than a company who is only using an accounting formula, but has never actually sold a pharmacy.

The value these partners received was well below market value. Of course the partner staying wants to pay less. The partner leaving thinks they should walk away with considerably more money. They refuse to sit down and talk it out, so once again the attorneys will win.

The only true value of anything is what somebody will actually pay for it. When parties fight over the value of a pharmacy and are more interested in attacking each other instead of generating profits it is likely they will both end up with nothing more than bitter feelings.

When a partnership is so broken it gets to this stage, it is better to sell the pharmacy and actually put some money in the partners pockets. If operating a drug store is your passion, then go down the road and start another one, but stop the negativity that will envelop you, you family, your employees, and maybe many others.

Tip for Pharmacy Partners:
When considering a pharmacy partnership make sure you consider the benefits of planning ahead and create a Buy-Sell Agreement before you finalize the partnership.

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