Before entering into a partnership, it is important for all partners to carefully consider the commercial, legal and business succession issues which inevitably flow from entering into a legally binding partnership, and address those issues in an agreed form, usually a written partnership agreement.
It is dangerous to believe that partnership agreements are “standard” documents. This “one-size-fits-all” approach fails to take into account the specific requirements that are unique to each individual partnership and partner.
Did you know that despite your partnership interest in the pharmacy, at law each partner is fully responsible for all liabilities and debts incurred by any partner in relation to the pharmacy, with or without your knowledge? If any partner fails to pay their share of debts, the other partners will be responsible at law to pay the shortfall.
You can endeavor to mitigate the commercial risks associated with the actions of other partners by having a solid understanding of each partner’s ethical standards, values and management approach before entering into partnership.
However, to protect your interest from a legal perspective, it is critical to have a legally binding agreement between the partners which appropriately deals with issues of liability, including a well-drafted indemnity as between the partners in the case of default by one partner to meet their share of partnership debts, consequences for a partner defaulting on their obligations, and clear boundaries for when a partner may use the pharmacy and pharmacy assets as security for a loan or incur other debts on behalf of the partnership.
Divvying up duties
Too often, pharmacists assume that:
– every partner will contribute all of their time to the management and operation of the pharmacy, without considering other pharmacies their partners may already own; and
– tasks they have taken on (e.g. book-keeping) entitles them to remuneration in addition to their partnership share of profits.
As a partnership, you need to agree on what roles and responsibilities within the pharmacy and the partnership each partner will take on (or if one or more partners will take on a managing partner role) as well as identifying what roles will attract additional remuneration, if any, and if applicable, paid or unpaid leave.
A pharmacy partnership is not dissimilar to a family. Where one person feels they are contributing more to the household than the other, cracks in the relationship begin to appear.
Clearly establishing at the outset of the partnership what the expectations of each partner will be, paves the way for a more amicable relationship and smoother operation of the pharmacy.
Other management issues to consider include decision-making, from day-to-day orders (including purchasing stock or transferring stock from related pharmacies) to significant decisions such as large expenditure (e.g. for a new dispensing robot) or hiring/firing of staff.
Will each partner have an equal vote in all the decision-making and expenditure of the pharmacy? This requires thought by all partners.
For example, Donna Tablet and Anthony Genol are 50/50 partners in the Happy Go Lucky Pharmacy. All decisions are made unanimously.
Donna Tablet and Anthony Genol decide to reward Dermot Eze, a hard-working pharmacist in the Happy Go Lucky Pharmacy, by offering Dermot Eze a 10% partnership interest in the pharmacy. That is, each of Donna and Anthony will sell down to a 45% interest and Dermot Eze will buy a 10% interest.
The partners agree decisions will be made by 75% majority, meaning Dermot Eze cannot achieve his desired outcome without the consent of both the other partners. However, Donna Tablet and Anthony Genol can achieve a 75% majority to the exclusion of Dermot Eze.
Increasing your partnership interest
If the partners intend that a minority partner will eventually acquire a greater interest in the pharmacy, or the whole pharmacy, you will need legally binding option to purchase provisions in your partnership agreement.
Option provisions set out terms for the purchase including when the option can be exercised and what the purchase price will be.
Options to purchase, if drafted with legal accuracy, will bind a party to a legal commitment to buy or sell an interest in the pharmacy. The option itself may also attract tax consequences, which may be different for each partner depending on that partner’s personal and business circumstances.
In order to protect your interests it is imperative you seek assistance from an expert lawyer with experience in pharmacy, tax and partnership matters to draft enforceable option to purchase provisions and provide informed tax advice.
From the minority partner’s perspective, there are also commercial considerations such as the purchase price for further interests in the pharmacy.
A common approach is for the purchase price to be as agreed by the partners, and failing agreement subject to an independent valuation procedure.
In some cases, the minority partner has been the sole working and managing partner (e.g. where the majority partner does not actively work in or manage the pharmacy) and in doing so has added value to the pharmacy, resulting in a market valuation of the pharmacy at the time of the option purchase being greater than at the time the minority partner acquired their initial partnership interest.
However, the value of the pharmacy must not be determined in a vacuum, and a holistic and sensible approach should be adopted.
For example, while a minority partner’s contribution to the pharmacy itself should be taken into account when negotiating an agreed price for the further interest, so too must other commercial factors which may have had an effect on the value of the pharmacy from all partner’s perspectives including the majority partner (e.g. the majority partner’s continued contribution to the goodwill of the pharmacy, then current PBS pricing, third-party agreements such as nursing homes).
At times, a partnership may require additional capital for the continued operation of the pharmacy or improvement of the pharmacy (e.g. a renovation or expansion).
Additional capital can be obtained in a variety of ways, subject to the partnership agreement.
For example, by existing partners injecting further funds or lending funds to the partnership, or the partnership borrowing additional funds from a third party financier (e.g. a bank).
An alternative option is to include additional partners who will contribute additional capital to the pharmacy.
It is critical for the continuity of operation of the pharmacy that all partners agree on the process or mechanism in which the pharmacy will meet these financial needs, and the agreed process documented in the partnership agreement.
The best option for the partnership will depend on how the partnership has been structured from the outset and whether the partnership agreement gives the partners flexibility with respect to raising additional capital.
Many typical template partnership agreements do not cater for the unique requirements of each individual partnership.
When it comes to bringing a partnership to an end, or transferring a partnership interest, there is not one size fits all.
Pharmacists can plan for the pharmacy to survive if a partner leaves the partnership (whether or not by choice) or in the case of death or permanent incapacity of a partner.
All of these events present possible risks for the pharmacy including disruptive disputes (exiting a partnership is not always amicable), business succession issues and possible unintended financial consequences (e.g. how to finance the purchase of an exiting partner’s partnership interest).
The risks can be alleviated, and goodwill of the partnership can be protected, if the partnership agreement appropriately documents the process to be followed and obligations of partners in these events, including:
– giving of notice;
– enforceable rights of continuing partners to purchase the exiting partner’s interests;
– insurance for these events;
– valuing the existing partner’s interest (which may not be market value in the case of a defaulting partner);
– enforceable restraints on existing partners; and
– the procedure for sales to the open market.
A well-drafted partnership agreement will provide each partner with legal protection, clarity of process and procedure for the operation and management of the pharmacy, and assist to preserve the goodwill of the business (e.g. in the case of an enforceable restraint against an existing member).