That’s right - getting in, getting along and getting out. Going into business with colleagues has a certain appeal to it, sharing the load in many respects. You can share the financial burden, the business stress, management duties - even have alternate holidays so that the business runs smoothly. Many good points to admire I am sure, but when times get tough, who can do what, when and to who becomes important.   

Getting it right at the start - make it a priority

Many partnerships start off almost accidentally. Usually someone starts looking at a pharmacy, gets someway down the track in the investigation and then decides a partner would be a good idea. Someone they know sort of says yes and, whilst there is a lot of flurry about buying the pharmacy (because it's all now urgent), the partnership agreement becomes one of things we will get around to later. And of course they never do.

This is a recipe for disaster, especially if you are a partner buying an interest in the partnership of less than 50%.

The first step is for someone to make this a priority. If one of the partners starts to make it clear that no bank borrowings will be signed up until this is sorted then I can imagine you will have everyone's attention. If you are dealing with a law firm of any size, it would probably be possible to have someone working on the purchase transaction whilst you are sorting out the partnership agreement with someone else in the firm.

Key areas to consider

There are a number of areas to consider before getting in. If you can cover off on these things, getting along will be easier and getting out will be managed and controlled.

These include:

  • share of equity
  • income between partners
  • salaries for working in the business
  • income protection insurance to be held by each partner
  • life insurance if someone falls under a bus
  • using the pharmacy as security for bank borrowings
  • each partners' role
  • exit provisions

Just to name a few. There are further complications to be sorted for example where two pharmacies are merging together. There include valuation issues, cut-off issues, timing due to pharmacy regulations and sorting out existing liabilities.

It would pay to get together with someone who can facilitate these discussions so that you can write down the outcomes and put them into a concise brief for your solicitor who will ultimately draw up the partnership agreement. Simply going to your solicitor empty handed without some direction might prove to be costly.

Getting out need not be painful

Partnership dissolutions can be very painful. Without an agreement, which sets out very precisely how this is to work, it can be a torturous path. What is almost as bad is having an agreement but one which is deficient in many areas when dealing with the dissolution of the partnership. In my experience, the achievement of an agreement that addresses the issues sensibly and with completeness requires the input of an accountant as well as a lawyer. There are a couple of stand-out areas here too.

  • You need to deal with multiple entities (eg. a service entity) to ensure all equity and liabilities are covered
  • Timing is generally the biggest issue given the regulation that surrounds change of ownership of pharmacy. Think about it, you need a solution that deals with the fact that you have responsibilities until the pharmacy board approves the change of ownership. You would like to get paid once this happens but in order to this the partner who is doing the buying needs to talk to banks and get your co-operation to sign things and agree on amounts - all well before the pharmacy board date. At the same time, generally the partner staying doesn't want you around but you still carry responsibility. If you are in partnership until the board date, you can't work out the final number until that date has past.
  • You can throw in to the mix, in NSW for example, where there are some stamp duty exemptions for incorporation of pharmacies. Such a move may be part of a change in partnership but needs careful understanding and implementation.

Sound difficult? It is. We have had experience in setting out an agreement that will address these issues, but perhaps the worst situation is when partners go forward blindly and make an agreement between them on what the exit price and terms are and when they come to their accountant it is found that one party has been greatly disadvantaged. At this point it can be very difficult to change the other person's mind about how much they are going to get.

Get it right at the start

When you think about it, usually at the start of the partnership most partners are in a more agreeable mood and it is easier to get compromise, which is better than paying expensive fees to lawyers and accountants to sort out the mess at the other end. So be wary and be sure to get the right advice before you make that 'life long commitment' of going into partnership.