Maryland Pharmacy Transactions and Capital Gains Tax

By Brad MacLiver
Authorship and profile at Google


Almost everything you own and use for personal, or business, purposes is a capital asset. When MD pharmacy owners sell a capital asset, the difference between the amounts you sell it for and the amount you paid for it (the basis), is a capital gain, or a capital loss.

Capital gains may also refer to "investment income" that arises in relation to real assets, such as property, financial assets, and intangible assets such as goodwill. In the U.S., all capital gains must be reported and the appropriate tax paid.

When selling a pharmacy or a drug store, there are specific tax strategies that can be used to help offset the tax liabilities. Unless a professional is handling a large number of Maryland pharmacy acquisitions, they usually do not know these federal regulations that allow for reducing the tax liability for the Maryland pharmacy owner.

During this period of history where it is more difficult to finance a business, MD pharmacy sellers may already be required to lower their asking price, so a pharmacy buyer can qualify for the financing required. On top of the lower offers they will be required to pay higher percentages in taxes.

This is a dilemma for the pharmacy seller who wants as much money out of the deal as possible. For most pharmacy owners their business is the largest asset they will ever own and selling the business at a certain dollar amount has been part of their retirement and estate planning. Knowing they will need to cut out a larger chunk of the proceeds to give to the government will cause some pharmacy owners to reconsider their retirement plans. The good news is there are financial tools and strategies that allow the pharmacy owner in Maryland to proceed with their plans.

Family Foundations are tax exempt/nonprofit organizations, which provide tax advantages and control over philanthropic activities. Family foundations are typically private foundations that are funded by a small number of sources, and do not conduct widespread fund-raising activities. They may receive gifts from friends and limited sources. Family members serve as trustees, directors, and officers. As private foundations they can make grants, or donations to other organizations. Creating a Family Foundation provides a variety of benefits, including income tax deductions, exemptions from gift and estate taxes, and the reduction or elimination of other taxes.

Another strategy that is currently available to assist with the burden of capital gains tax is the Charitable Remainder Trust (CRT). These are legally described as Split Interest Trusts, a term that is used due to the blend of philanthropic motivations and personal financial aspects. CRT’s are capable of decreasing tax liabilities, increasing a business owner financial wealth, and simultaneously provide for a vehicle give to charity.

CRT’s are created when a person donates assets into this unique type of Trust. These assets can be stocks, cash, real estate, etc.  The CRT is set up for a set period of time, or until the donor’s (pharmacy owners) death. An individual (pharmacy owner or family member) can receive income from the Trust’s assets. Upon the donor’s death the assets go to a designated charity. Part of the income from the Trust can be used to purchase life insurance on the donor. The proceeds of the life insurance go to a designated heir(s) who receive the money without incurring any estate tax liability.

Some tax strategies including the use of CRTs are not widely known. It would be advisable for MD pharmacy business owners to be aware of the different tools that are available in structuring a business transaction. They should also be aware that only a professional with vast experience in CRTs should be used to setup a Charitable Remainder Trust. Not following the strict IRS guidelines could be cause for increased taxes, penalties, and in some cases criminal charges.

Over the years there have been unscrupulous individuals who have tried using CRTs and similar financial tools in illegal scams. With the increase in capital gains taxes there are expectations more scams will be floating around out there. Be knowledgeable about the possibilities, but be confident you are working with experts in your industry.

You should consult a firm with extensive experience in pharmacy and drug store acquisitions in Maryland. Firms that have the knowledge and expertise to structure the transaction appropriately, for tax considerations, can save a pharmacy owner large sums of money when a pharmacy in MD is sold.

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Buy-Sell Agreements for Maryland Pharmacy Owners

By Brad MacLiver
Authorship and profile at Google


When a MD pharmacy is owned by two or more people the stockholders/partners should have a Buy-Sell Agreement. A buy-sell agreement is a written document that provides the procedures and governs the future sale of the pharmacy business.
               
Maryland pharmacy buy-sell Agreements protect the interest of the parties who own the pharmacy in MD and directs the actions triggered by a stockholder leaving the business due to death, disability, divorce, dissolution, or retirement. The agreement will govern how and when the shares of the pharmacy business can be sold, or transferred. It will also provide guidance as to how the pharmacy will be valued along with the obligations of the remaining shareholders of the Maryland pharmacy.

It is important to establish buy-sell agreements because the different elements of a future sale would be predetermined and won’t need to be negotiated during a heated dispute or grieving period. It also provides both the stockholder and the family a level of comfort that when the inevitable time for an exit strategy comes, the process was thoroughly thought out in advance.

The down-sides of not having a buy-sell agreement between pharmacy owners are that a disability potentially leaves one partner working more while the other is not adding to the productivity.  Should a death occur without an agreement, one partner could be left with a non-productive heir, or a new partner may be inserted that who a conflicting personality with the surviving partner.  Having the wrong partner is a potentially devastating scenario for the Maryland pharmacy business.

There are various types of buy-sell agreements such as: Entity Buy-Sell Agreement, Cross-Purchase Buy-Sell Agreement, Wait and See Buy-Sell Agreement, Disability Buy-Sell Agreement. Buy-sell agreements are also known as a Business Will or a Buyout Agreement.

Potential components of a Buy-Sell Agreement:
1. The names of stockholders and the number of shares and voting rights of each. 
2. Guidance for the certified pharmacy valuation in Maryland and purchase of a stockholder’s shares.
3. Mutual covenants and considerations.
4. Restrictions on transferring, purchasing or encumbering the company’s stock.
5. Protocol in the event of a shareholder’s divorce or termination of a shareholders employment.
6. Obligation to buy/sell shares from an estate.
7. Purchase of insurance to ensure ability to meet obligations.
8. Purchase of stock paid in lump sum or by installments.
9. Remedies for breach of the agreement or default of payment.
10. Until transfer is complete the right to inspect books and records.
11. Amendments and notices for offers or legal matters.
12. Enforceability of the agreement, the binding effects, and arbitration procedures for disputes.
13. Process for dissolution, or liquidation, of the corporation.
14. Maintaining the premises during a transition.
15. Preserving representations and warranties.
16. The terms of transfer.
17. Bill of Sale.

Buy-sell agreements are often funded with a life insurance policy in order to ensure the required funding is available. Should one of pharmacy owners in Maryland die, the life insurance settlement provides the funds to buyout the partners shares from the estate for the remaining pharmacy owner.

Life insurance coverage for each partner needs to be in place, because without a way to accomplish the purchase of the MD pharmacy shares the buy-sell agreement will not be functional. As the business grows and develops the amount of insurance need to be adjusted to provide an adequate coverage. Without the insurance the surviving stockholder may not have enough cash to satisfy the amount required to buy out the estate - leaving the survivor with an unwanted partner.

To acquire the adequate insurance coverage and determine the specifics of the buy-out terms, it is necessary to perform a certified pharmacy business valuation. There are a large number of companies that provide business valuations. Due to the dynamics and current market conditions of the Maryland pharmacy industry a valuation firm should have extensive pharmacy experience. Realistic or even adequate valuations for a pharmacy business in MD cannot be achieved with simple accounting formulas and multipliers.

Because pharmacy buy-sell agreements are such extremely important documents, they need to be completed with utmost seriousness and care. Even with a long standing partnership, it is only too late to create a buy-sell agreement when an event has already occurred....that would require the document.

Tips:
1. Buy-Sell Agreements are critical documents that should not be taken lightly. Consult a licensed professional.
2. Documents must address the proper laws and regulations which vary from state to state. Seek the proper guidance.
3. Premiums for insurance that will fund the buy-sell agreement might be deductible.
4. Ensure that the Maryland pharmacy valuation is performed by an established MD pharmacy industry expert.