In Australia, one of the most common pharmacy ownership structures is a partnership. Theoretically, it is a simple arrangement between pharmacists to own a pharmacy, contribute to running it, and share the risks and profits. But in practice, it is not always that straight forward.
As we all know (especially as pharmacists), prevention is better than a cure. So, let’s discuss some considerations for your pharmacy partnership agreement.
Why have an agreement from the outset?
It can be very tempting to leave preparing and signing a partnership agreement to another time.
We encourage clients to finalise this ASAP! Going through the process of documenting how the business and partnership will operate will assist the partners to appreciate the expectations of each other and minimise the risk of misunderstandings.
In addition, partnership agreements should deal with the following situations:
- When there is a dispute between the partners
- When a partner dies or has a major health issue
- What happens if one of the partners does not fulfill their obligations.
Remember, partners can unanimously agree to ignore the agreement. However, the agreement will prevail when you cannot agree on something.
The hope is that you never have to refer to the document again!
It’s not personal, it’s business
Like any successful relationship, you need to be on the same page. Do your homework and make sure that you have common values and a shared vision for your pharmacy with your prospective partner/s.
We encourage clients to outline their vision in the partnership agreement.
If you are friends and want to own a pharmacy together, keep the distinction between personal and business relationships clear. Document business responsibilities, reporting and commitments in your partnership agreement. This will set the stage for a long, happy partnership.
We also see many partnerships that evolve into personal relationships over time. Again, it is important to differentiate between personal and business interactions, maintaining professional boundaries. This distinction ensures open and effective communication, particularly when addressing challenging aspects of your pharmacy business.
Decisions, decisions, decisions
Having a good framework for decision making in any business is essential, as is a planning, review and performance management process. Make sure your agreement has this covered and outlines rules and responsibilities for working partners. Certain roles and decisions may be made by management, others by working partners, and some matters may require unanimous consent from the partners. You should also document the required frequency of meetings and reporting regularity, particularly partnership meetings.
In the case of conflict, you’ll also need to scope your dispute resolution and mediation approach in your partnership agreement.
Equality, heroes and sidekicks
A partnership agreement is not about equality, but it is about fairness. In a partnership arrangement, the percentage of equity owned by partners may differ. While this may be the case, your agreement should document the rights and responsibilities of partners, which may, or may not, differ with their percentage share. For example, profit distribution or voting rights. Will this be based on the proportion of equity a partner holds, or will it have a relationship with their position in the business as a working partner? Will additional money a partner contributes to the business be treated as a loan or capital?
It’s a common strategy to have partners at different life stages. While this is a measure to plan for succession and exit, it also allows for personal circumstances, with partners committing to differing levels of workload or management responsibility in your pharmacy business. For example, two of the three partners may work full time and manage the pharmacy, while the third has a part time role (or no operational role at all). Your partnership agreement will document these differences and the relative impact on decision making authority and wages.
Everything works out in the end
Everything may work out in the end, but not necessarily for the benefit of all parties. This will only happen if you plan for it. So, begin with the end in mind!
A new partner joining or an older partner leaving a partnership will require a reset; one partnership will end and a new one will be created. This has equity and tax implications for each party. The process by which these decisions occur should be documented in your partnership agreement, along with a method of valuation, and consideration of restraint clauses.
Partnership agreements can be drafted to contemplate these changes and avoid the need to redocument the partnership arrangement when there is an entry or exit. Nevertheless, the agreement should be reviewed periodically to ensure it remains relevant.
Other rules relating to any entry or exit of a partner should also be documented in your partnership agreement. For example, do existing partners have the right to buy an exiting partner’s interest in the pharmacy? What happens if a partner, for health reasons or otherwise, is unable to participate in running the business? Are they expelled from the partnership or can they maintain a silent interest? How do you decide on the fit of a potential new partner?
The value of “silent” equity partners can be quite significant as their equity may facilitate younger partners obtaining the necessary funding for their introduction to the business. However, there can be a time when they become an impediment to the succession model. It is important for ground rules to be outlined on when it is time for a retired partner to leave the partnership.
Getting your partnership agreement right
At times, we fulfil a stewardship role with our clients to ensure that their partnership agreements cover what is necessary and needed, and then implemented appropriately. Chairing partnership meetings and regular reviews is one example of this.
To review your own agreement or set in place some of the ideas we’ve discussed in this blog, get in touch with me at Holman Hodge. To find out more:
- The Pharmacy Guild of Australia has a fact sheet that defines what a partnership agreement is and a list of content considerations. You can find it here.
- I discuss further issues that can impact pharmacy partnerships in this blog, which looks at the considerations of younger partners and negative equity.
About the author: Frank Morgante leads the pharmacy practice at Holman Hodge. His team of specialist pharmacy accountants and advisors support pharmacy owners and businesses across Australia with accounting and compliance, tax and regulatory services, transaction, forecasting, benchmarking, planning and strategic advice.
This blog post was originally published by our valued member firm, Holman Hodge.
