Big Box Purchase Offers: Considerations Before You Buy
Purchase offers received from big box retailers can look very appealing. Before signing, pharmacy owners need to consider important factors, such as inventory, prescription files and goodwill. Ollin Sykes highlights these key factors and discusses how to decipher if a purchase offer you receive is a good deal in the long run.
If you prefer to read this content, the video transcript is below.
Ollin: Essentially the big box contract is going to, typically, list what they’re going to buy specifically. For example, inventory with specific inventory instructions. And here in, you’ve got to be extraordinarily careful about what those in inventory structures say or not say because it’s not just buying all your inventory across the board, lock stock and barrel, both script and OTC. So, beware. It’s very specific about what they’re buying versus what they’re not buying.
Prescription files, typically, obviously this is the mainstay of the contract where they’re buying all prescription files and records, data utilized, in your script management system for a particular certain price. And again, the price sometimes can be low or high, depending on how bad the big box entity wants to own your store and your location.
So, with the purchase of the script files goodwill is typically automatically included at no additional cost in most transactions for the business. In course, in these contracts, these buyers never assume any liabilities that you may have, including the wholesale bills and any other outstanding obligations you may have. They, obviously, are going to want immediate access to all your data and information to do their due diligence. They’re going to want your telephone numbers, your names, all your third party, probably, in some cases, social media information and they are going to provide to you a covenant not to compete. Because they don’t want you competing against them, should they purchase the majority of your assets and your business. They don’t want you competing against them for some certain period of time. Sometimes it’s three years. Sometimes it’s five years. Sometimes it’s shorter. And those kinds of things, sometimes can be negotiated. And frankly, sometimes, part and parcel, that or key non-compete agreements for maybe a PIC you may have or some key technicians that you may have. And sometimes that gets to be very problematic because, you know, what’s the reason that an employee who maybe doesn’t have a contract would be signing the non-compete, other than to help you complete, make you to allow you to consummate a sale? And without a contract they have that may be problematic with itself.
Of course, when the purchase of the script files there’s typically going to be a hold-back amount, so at closing, whatever you receive for your inventory, again posted details of the instructions of what they’re buying versus what they’re not buying. They’re going to pay you “X” dollars or “X” percent, maybe, of your prescription files and hold back monies for certain periods of time. Maybe a year or longer. Maybe six months. And maybe require you to prove your script volume after some specified period of time, say six months. And if you don’t, generate “X” volume that may be shown and structured in the contract then the whole back would be charged again. So, what we typically have seen is what appears on the front end can sometimes be a number that’s, sometimes, too good to be true. The one suggested for the callbacks and the adjustments that the big box retailers will have in these contracts- the deals simply are not as good as you might think. Also, they typically are not going to be hiring your employees, they’re going be leaving you with your land and building in most cases. Probably closing the existing store, leaving when you with inventory that they’re not buying. And all those issues are things that you have to consider. Not withstanding are the tax effects that you have to consider. Cause essentially, in some cases, this is probably going to be treated as an installment sale with both capital gain and ordinary income components. The ordinary income being covered and not to compete.
But these are the kinds of things that your advisors need to assist you with, but please get your advisors involved in these contracts. If you ever accept one of these contracts on the front end.