Whether you’re an experienced operator or a first-time buyer, it is crucial to understand the key aspects of structuring a pharmacy purchase.
When you have decided to buy a pharmacy, one of the first decisions you have to make is whether you will be buying the shares in the company that owns the business. This is known as a share purchase.
Or are you going to buy the business itself? This is known as an asset purchase. This is where you acquire the business and all of the pharmacy’s assets, including the goodwill, stock and fixtures and fittings. Any of the seller's liabilities are generally excluded from the transfer.
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An asset purchase usually requires a lot less due diligence than a share purchase. However, unlike a share purchase, an NHS licence transfer will be required.
In a share purchase, you acquire the shares in the company that operates the pharmacy. So although the underlying ownership changes, the company continues to hold all of the assets and liabilities. You therefore effectively inherit all of the company’s historic liabilities and activities. In-depth due diligence will be required and could lead to increased legal and accounting costs.
Either method of purchase has its own tax and financial implications, and you should always seek tax advice at the outset.
Do I have a choice?
The structure is likely to have to be negotiated between a buyer and a seller, who will often have different views and objectives. In some transactions, there will not be a choice about how the sale is structured because of the pharmacy's existing business structure. If the existing pharmacy is not owned by a company – for example, if it is owned by a sole trader or a partnership – the only option you will have is to purchase the business through an asset purchase.
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Only when the pharmacy is owned by a company will you have a choice of whether to proceed via a share or asset purchase. There are also situations where a pharmacy owned by a limited company needs to be acquired via an asset purchase. For example, this would be the case if one pharmacy from a company that operates many pharmacies is being sold or if the company contains other assets the sellers want to keep.
Generally speaking, where there is a choice, you may prefer an asset purchase as there is less paperwork and it will keep professional fees to a minimum. It also presents less overall risk to you, as you will not generally assume the pre-existing liabilities of the business. A tax deduction will normally be available in respect of the cost of goodwill and stock, and capital allowances may also be available in respect of plant and machinery costs. These deductions can be valuable and are not available with a share purchase.
Asset purchases are also not liable for stamp duty, while share purchases incur stamp duty reserve tax at a rate of 0.5% of the purchase price. However, as more and more pharmacists are now operating as limited companies, it is likely sellers will want to sell the company, as it will often be more tax efficient for them to do so.
There are some advantages to buying a pharmacy through a share purchase. With a share purchase, there is no change in the underlying ownership of the pharmacy’s assets. The company remains the named owner of the key assets, including the NHS contract and the main supplier contracts. So there is no need to change any of the company's contracts, licences or property deeds. In this way, a share purchase can speed up transactions as there is less scope for third-party delays. Another potential advantage of a share sale is that any tax losses in the company selling the pharmacy will be available for use by you after the purchase.
What are the trading structure considerations?
If you are buying a seller’s company through a share purchase, you will already have a trading structure in place. So you just need to decide if you’ll be purchasing the company shares in your name or through a holding company. This is when you have another limited company that owns the shares of a trading business.
A holding company structure can have tax advantages in some circumstances, particularly if you have other business assets or plan to purchase more pharmacies in the future. However, it will also incur additional costs, so it’s worth seeking advice to make sure you make the right decision based on your circumstances.
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If you are buying the seller’s assets, you will need to decide on the most appropriate trading structure. This should be discussed with your accountant as early as possible in the transaction. Whether you decide to trade through a limited company or be a sole trader or partnership, everything needs to be in place before completion. There are different options and you need to decide which is best for you:
- Sole trader – As a sole trader, the business income is considered yours, has to be reported in your personal tax return each year, and is taxed at personal income tax rates. Business losses can be written off against other income. Sole proprietorships are easy to set up and administer but can leave you personally exposed to legal claims.
- Partnership – A partnership is similar to a sole trader but with more than one individual involved. A proportionate share of the business income is allocated to each partner to be included in their income for personal tax purposes. All partners are jointly liable for all debts.
- Limited company – A limited company is a legal entity entirely separate from you, the business owner. Profits, taxes, and tax returns are all calculated separately for you, the individual, at lower corporation tax rates. A limited company is subject to special regulations as set out in the Companies Act 2006, has more complex administration requirements and is more costly to set up and maintain. However, it also offers tax-saving opportunities.
To decide on the best trading structure, as well as looking at the tax implications, you also need to think about your plans for the business and your eventual exit plan. While you won’t know for sure, you should give some thought to how long you want to own the pharmacy, whether you want to purchase any more branches and whether you eventually want to sell the business or pass it on to family.
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Having a clearer idea of your exit plan and objectives will also have an impact on how to set up your corporate tax structure early on so you can minimise your tax liabilities and be best set up for the future.
There are advantages and disadvantages to each option when it comes to choosing the structure for your purchase and trading. Getting the right advice from specialist pharmacy advisers before you buy means you can pick the best purchase and trading structure to suit your circumstances.
Atif Butt (FCCA) is senior accountant at Hutchings Accountants Ltd – specialist pharmacy accounting
