The passing of Bill 28 this past April 20, within the framework
of budget cuts announced by the Quebec government, has already made
considerable waves, namely because of its impact on Quebec
This bill, which is to take effect on June 20 despite vigorous
opposition from Quebec pharmacists, revises the list of billable
professional services as well as the fees payable to pharmacists.
While the bill allows pharmacists to provide three new services,
various cuts imposed on pharmacists will result in a drop of about
$177 million in their total fees, as the public plan will no longer
pay them for certain procedures, such as filling pill
The AQPP, Quebec's association of owner pharmacists,
continues to oppose the cuts proposed by the government, arguing
that these cuts will lead to a reduction in services and opening
hours, and that the annual revenues of a typical pharmacy will
decrease by $100,000 as a result.
It is thus not surprising to note a significant reduction in the
frequency of retail pharmacy acquisitions since Bill 28 was passed:
most pharmacists are now "sitting on the fence", waiting
to see how the situation plays out. While prospective vendors watch
the long-established value of their goodwill fritter away,
prospective purchasers are playing hardball to negotiate lower
acquisition prices. Lenders, meanwhile, struggle to justify new
credit facilities based on "pre-budget-cut" conditions
and may have to tighten the screws on clients whose annual results
no longer meet their requirements.
The challenge will be to agree on the valuation of the business
on a going-forward basis, in a context where the effect of the
announced budget cuts remains to be determined. When a vendor's
expectations (often an emotional issue when selling one's
business) aren't being met by potential buyers or their
lenders, the transaction must be structured so as to narrow the
Uncertainty regarding the future performance of a business is
not a new phenomenon in the area of commercial transactions and
there are solutions to consider. We propose a few below.
1. Balance of sale with a negative adjustment
Prudent buyers often insist on deferring payment of a portion of
the purchase price for a specified period in order to test the
vendor's representations and warranties regarding the financial
performance of the business. The unpaid balance may serve to
compensate the purchaser in the event of a misrepresentation, for
example. However, the purchase & sale agreement may be
structured so as to provide for an "estimated sale price"
(based on the vendor's current perception of the value of its
business) payable in part at closing, and to tie the payment of the
balance to a negative adjustment mechanism (based on the future
performance of the business over a specified period) whereby any
material reduction in the value of the business would trigger a
reduction in the balance payable by the purchaser.
2. Earn-out provisions
Another option is to include a clause in the purchase & sale
agreement providing for positive indexation of the estimated sale
price (which in this case would be closer to the purchaser's
position) based on future performance of the business, meeting
certain targets, etc., whereby additional amounts become payable on
predetermined dates if the required conditions are met. There is no
established formula for drawing up a "good" earn-out
clause. It is up to the parties to determine the mechanics of the
clause, the most important of which are the financial benchmarks
and calculation method to be used. In such cases, the vendor
pharmacist would generally remain employed by the pharmacy (and the
purchaser!) for a certain time after closing in order to contribute
to the performance of the business and facilitate the achievement
of the specified targets. It is critically important that the
provisions of the earn-out be clearly, objectively and precisely
drafted in order to avoid any future misunderstandings.
3. Employment agreement for vendor pharmacist
Typically, when a pharmacy changes hands, the vendor pharmacist
does remain employed by the business for a certain period after the
transaction, either to ensure a smooth transition in the eyes of
the clientele, in the context of an earn-out structure, or for any
number of other reasons. The vendor's remuneration, or any
performance bonus or other benefit, can be an added incentive that
brings the parties' divergent positions closer
While the passing of Bill 28 has dramatically changed the
transactional climate in the retail pharmacy sector, one thing
remains constant: reasonable and well advised business people can
always find common ground by evaluating the various options
available to deal with the effects these legislative changes.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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