Essential Stocktake Strategies for a Smooth Pharmacy Sale

Stock, or stock-in-trade, is a critical component of any pharmacy business. Proper management of the stocktake process during the sale or purchase of a pharmacy is vital for accurate payments and a smooth ownership transition. This article highlights key considerations to help pharmacy owners navigate stocktake effectively.

Considerations for your contract

In a pharmacy business, stock includes dispensary items like prescription medicines, as well as over-the-counter products such as non-prescription medicines as well as front shop items like personal goods, and household items. When negotiating the terms of a purchase contract, it’s essential for buyers and sellers to clearly define the stock included in the transaction to minimise disputes or delays at either settlement or the stocktake itself.

Since stock is continually bought and sold, its value is typically estimated in the contract. However, for a "walk in, walk out" transaction, stock is included in the purchase price and isn’t adjusted at settlement.

The stock estimate in the contract should be sufficient to allow for smooth commencement of trade on the morning of settlement, but not so high that it results in surplus or increased costs, or so low that it results in the business struggling to operate. Sellers are contractually required to trade in the “ordinary course of business,” and they cannot attempt to unreasonably reduce or increase stock levels close to settlement.

In addition, the contract should clearly outline the stocktake process, including stock maintenance during the transaction, how stock is valued at stocktake, payment of the stock amount both at and after settlement, permissible adjustments, and steps for resolving any disputes.

Appointing a Stocktaker

Appointing an independent stocktaker with pharmacy experience is advisable. However, given there are limited companies available, an early booking is recommended. Stocktake should be organised early and is typically conducted after business hours on the day before settlement. The cost of hiring a stocktaker is usually shared between the parties. While the parties may conduct the stocktake themselves to reduce costs, this is not recommended due to the increased likelihood of disputes, inefficiencies (particularly with large stock levels) and subsequent delays to settlement.

Understanding How Stock is Valued

Agreeing on the stock valuation method is crucial, as it directly impacts the final stock value and payment. Your chosen stocktaker can assist with industry standard guidelines however key factors to consider include:

• Current Landed Invoice Cost - this method bases the stock valuation on the invoice cost at the time of stocktake, including taxes, duties, and freight, while accounting for any discounts. This ensures the valuation reflects the actual cost of the stock to the business.
• Damaged Stock and Shelf Life- stock that is damaged, unsaleable or has an expiry date which is less than 3 months from the date of settlement is usually excluded from the stocktake. This prevents outdated or unsalable items from inflating the stock valuation and reduces pressure on the buyer to buy and subsequently sell items which may not be appropriate for sale.
• High cost drugs – it is important to determine whether the business stocks high cost drugs, the threshold for what is to be considered a “high cost drug” and how the high cost drugs will be dealt with on settlement. Again, this can help to minimise disputes on settlement.

Understanding these factors helps both parties achieve a fair and transparent stock valuation and ensures a smooth and stress free settlement.

Payment of Stock

Often the final stock value may not be determined until after settlement has occurred. As such, the buyer typically pays an agreed portion of the stock estimate at settlement. The balance is usually held in the seller’s solicitor's trust account until the stock value is agreed by the parties.

If the final stock value is less than the estimate stated in the contract, the buyer is entitled to a refund. If the value matches or is more than the estimate, the full amount is released to the seller. Where the stock value exceeds the estimate, it’s a matter of referring to the contract to determine whether the buyer must accept the excess stock or whether the buyer is at liberty to choose either purchase all or part of the excess stock, or reject items to reduce the total value to the estimated amount.

A contract which has been carefully drafted by lawyers with pharmacy expertise can ensure the stocktake process is appropriately managed to prevent disputes, delays, unnecessary costs, and financial discrepancies, ensuring a smooth, fair, and successful transaction for both parties.

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Michelle Neil is a Lawyer at Vitality Law Australia, an award winning commercial law firm servicing pharmacy businesses and healthcare professionals across Australia.? For further information, email [email protected] or visit www.vitalitylawaustralia.com

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