Pharmacy Buy-Sell Agreement: Protecting Co-Owners
A pharmacy buy-sell agreement is a contract among co-owners that spells out what happens to an owner’s interest when certain events occur, such as retirement, disability, death, divorce, a dispute or a desire to sell. Without one, partners can find themselves negotiating price and terms at the worst possible moment, often with a grieving family or an unhappy partner on the other side of the table.
This article explains the main parts of a buy-sell agreement for independent pharmacies and how buyouts may be funded. Ownership, tax and estate rules vary by state and situation, and nothing here is legal, tax or accounting advice. Co-owners should work with healthcare counsel, an accountant and, where relevant, an insurance professional.
Why Co-Owned Pharmacies Need a Buy-Sell Agreement
Partnered pharmacies are especially exposed to ownership disruptions. In many states, rules govern who may own a pharmacy, and a change in ownership may require notice to or approval from the state board of pharmacy. If an owner’s interest passes to a spouse or heir who is not involved in the business, the remaining partner may face uncertainty about control, licensing and payer relationships.
A well-drafted agreement can help:
- Keep ownership with people who are active in the pharmacy
- Set a fair, agreed method for determining price
- Provide a clear process and timeline for a buyout
- Give a departing owner or their family a path to be paid
- Reduce the risk of disputes that can disrupt patients and staff
Triggering Events
The agreement should define which events allow or require a buyout. Typical triggers include:
- Death or long-term disability of an owner
- Retirement or voluntary departure
- Loss of a professional license
- Divorce, where an ownership interest could be affected
- Bankruptcy of an owner
- A deadlock between owners on major decisions
- An offer from an outside buyer
For each event, the agreement should state whether the remaining owners or the company must buy, may buy or have a right of first refusal. Some events, such as death, may call for a mandatory purchase, while others, such as an outside offer, may only give the remaining partners the first opportunity to match the terms.
How Price Is Determined
Price is often the most contentious part of any buyout. A pharmacy buy-sell agreement can set the method in advance. Approaches include:
- Agreed value: owners set a value and update it periodically, though values can become outdated if not revisited
- Formula: value is calculated using an agreed formula based on financial results
- Independent appraisal: one or more qualified appraisers determine value at the time of the event
The agreement should also address how inventory, receivables, debt and real estate are treated and whether any discounts apply to a minority interest. Our guide on how a pharmacy practice is valued explains the factors appraisers typically consider, and our advisory and consulting services can help owners prepare.
Funding a Pharmacy Buy-Sell Agreement
An agreement is only as useful as the ability to pay for the buyout it requires. Co-owners should plan how each type of buyout would be funded.
Insurance
Life and disability insurance can provide funds when an owner dies or becomes disabled. Policies may be owned by the company or by the co-owners, depending on the structure. The choice has tax and estate implications that should be reviewed with an accountant and counsel.
Installment Payments
The agreement may allow the price to be paid over time. This can ease cash flow for the remaining owners but leaves the departing owner or their family exposed to the pharmacy’s future performance. If the remaining owners also borrow from a lender, seller notes are typically subordinate to that loan, and lenders may limit how they are structured.
Third-Party Financing
Remaining owners may finance a buyout with a loan. SBA 7(a) loans may be used for partner buyouts in some situations, subject to program rules, eligibility and lender review. Conventional loans may also be available. Every loan is subject to approval, and nothing here is a commitment to lend. Our article on pharmacy partner buyout financing covers how lenders evaluate these transactions.
Other Terms to Include
- Restrictions on transferring ownership without consent
- Non-compete and non-solicitation provisions, which counsel should review because enforceability varies by state
- How personal guarantees on pharmacy debt will be released or replaced
- How the departing owner’s obligations under leases and loans will be handled
- A dispute resolution process
- A schedule for reviewing and updating the agreement
When to Put an Agreement in Place
The best time to sign a buy-sell agreement is when owners first become partners and everyone is on good terms. If a pharmacist is joining through a pharmacy buy-in, the agreement should be negotiated as part of that transaction. Existing partners without an agreement should consider creating one now and revisiting it as the business grows.
Connecting the Agreement to Succession Planning
A buy-sell agreement handles unexpected events and planned departures between co-owners. It works best alongside a broader succession plan that considers who will lead the pharmacy, how key staff will be retained and when owners hope to exit. Our guide to pharmacy succession planning covers that bigger picture.
Final Thoughts
A pharmacy buy-sell agreement protects co-owners, their families and the business by settling key questions before they become emergencies. Clear triggers, a sound valuation method and a realistic funding plan can help a buyout proceed with less conflict and less disruption to patients.
US Medical Funding helps pharmacy owners finance partner buyouts, buy-ins and acquisitions. Learn more about our pharmacy financing options.
