Transition payments and selling a pharmacy (Pharmacy Guild – August 2013)

If a pharmacy is sold through a sale of shares, there are no changes to the underlying business and the pharmacy continues on as usual under the new ownership. The balance sheet items, including debtors, uncollected prescriptions, stock, creditors and loans all in existence as at the date of share sale, belong to the company and these items should be factored in when the share price is calculated.

However, when a pharmacy business is sold (assets, stock and goodwill) from one owner to another, debtors and creditors are not usually sold as part of the transaction. In this instance, debtors and creditors will need to be paid or recovered by the vendor. Any uncollected prescriptions will need to be adjusted for, and part charges paid by the patient when collecting prescriptions need to be passed through to the vendor or an adjustment made on settlement date.

The PSA and pharmacy sales

Under the new PSA, pharmacies are paid an advance transition payment at the beginning of the month based on their dispensing ratio and the projected amount due for the services that the pharmacy will provide that month.

As these advance payments are only estimates, any difference between the forecasted amount and the final amount that the pharmacy is entitled to is adjusted for, four months later, once the actual data is available and has been processed, by either increasing or decreasing the transition payment in the later period.

Forecast and adjustment payments, regardless of when paid, relate to the period stated on the notice. Extra care needs to be taken for pharmacies when the business is sold part way through a month. Agreements should contain a clause that allows for the portion of any forecast payment that relates to the period after which the business has new ownership to be passed by the vendor to the purchaser, either on or subsequent to settlement.

The same would apply to a script batch payment that was incorrectly paid to the vendor relating to a period after the business was sold. Similarly, any subsequent adjustments to the forecast payments need to be passed on or recovered from the relevant owner.

Notifying authorities

It is important that the appropriate authorities are notified as soon as possible of the change of ownership and the bank account number is updated to the new owners’ account as a matter of priority. This will minimise any issues with correctly recognising the cut-off of script batches and forecast payment income between the vendor and the purchaser.

It is also important for reporting purposes to correctly make adjustments in a pharmacy’s financial records for the transition payments and adjustments to include them in the period the payment relates to, rather than when they are physically received. If the adjustments are material, they can have the effect of understating or overstating the annual profit of the business.

Published in Contact Magazine August 2013 written by Atul Mehta.

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