Pharmacy Transactions in Washington 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 WA 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 Washington 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 pharmacy acquisitions, they usually do not know these federal regulations that allow for reducing the tax liability for the pharmacy owner.

During this period of history where it is more difficult to finance a business, pharmacy sellers may have already been required to lower their asking price so pharmacy buyers can qualify for the financing required.  In addition to having lower offers, they are also required to pay a higher percentage in taxes.

This is a dilemma for the pharmacy seller in WA who wants as much money out of the deal as possible. For most who own a pharmacy, their business is the largest asset they will ever own and their retirement and estate plan rely on selling the business at a certain dollar amount.  With the knowledge that they will need to cut out a larger chunk of the proceeds to give to the government, this will cause some pharmacy owners to reconsider their retirement plans.  However, there is good news in that there are financial tools and strategies that allow the pharmacy owner in Washington to proceed with their plans.

One strategy is to utilize Family Foundations.  These are tax exempt/nonprofit organizations that provide tax advantages and control over philanthropic activities. Family foundations are usually private foundations funded by a small number of sources.  They do not hold widespread fund-raising events, but they may receive gifts from friends and other limited sources.  The founder's family members serve as the trustees, directors, and officers. Because they are private foundations, they can make grants or donations to other organizations. Having a Family Foundation provides a number of benefits including, income tax deductions, exemptions from estate and gift taxes, along with the reduction or elimination of other taxes.

Yet another strategy that is currently available to assist the capital gains tax burden is the Charitable Remainder Trust (CRT). CRT’s are legally described as Split Interest Trusts. The term is used because of the blend of philanthropic motivations and personal financial aspects. CRT’s can decrease tax liabilities, increase a business owner financial wealth, and at the same time provide a vehicle for charitable giving.

CRT’s are formed when a person donates assets to this special type of Trust. Assets can be cash, stocks, real estate, etc. The CRT is set up for a set period of time, or until the donor’s (pharmacy owners) death. An individual (WA 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 pharmacy business owners in Washington 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. Firms that have the knowledge and expertise to structure the transaction appropriately, for tax considerations, can save a Washington pharmacy owner large sums of money when a WA pharmacy is sold.

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Buy-Sell Agreements for Pharmacy Owners in Washington

By Brad MacLiver
Authorship and profile at Google


When a WA 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 Washington pharmacy business.
                 
Pharmacy buy-sell Agreements are designed to protect the interest of the parties that own the WA pharmacy and direct the actions triggered by a stockholder who leaves the business due to death, disability, divorce, retirement, or dissolution. The buy-sell agreement will govern when and how the shares of the pharmacy business can be transferred or sold. It also provides guidance as to how the Washington pharmacy should be valued along with the the obligations of all remaining shareholders of the pharmacy.

Buy-sell agreements are crucial documents because the different elements of a future sell will be predetermined and won’t require heated dispute or negotiation during a grieving period. It will provide both the family and stockholder with a level of comfort that, when the inevitable time comes for an exit strategy, the process was carefully thought out in advance.

Disadvantages of not having a buy-sell agreement between Washington pharmacy owners is that a disability may leave one partner working more and another not adding to the productivity. In the event of a death, without an agreement, one partner may be left with a nonproductive heir, or a new partner may be inserted that has personality conflicts with the surviving partner. The wrong partner could be devastating for the WA 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 elements of a Buy-Sell Agreement in Washington:
1. Stockholders names and the number of shares and voting rights of each. 
2. Guidance for the certified WA pharmacy valuation 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.
15. Enforceability of the agreement, the binding effects, and arbitration procedures for disputes.
16. Process for dissolution, or liquidation, of the corporation.
17. Maintaining the premises during a transition.
18. Preserving representations and warranties.
19. The terms of transfer.
20. Bill of Sale.

To make certain that the required money is available, buy-sell agreements are typically funded with a life insurance policy. Should the death of one of Washington pharmacy owners occur, the life insurance settlement provides the necessary funds for the remaining pharmacy owner to buy the partner's shares from the estate.

Life insurance coverage for each partner needs to be in place, because without a way to accomplish the purchase of the 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 have the adequate insurance coverage and to determine the specifics of the buy-out terms, a certified WA pharmacy business valuation is needed. There are a large number of companies that provide business valuations. Due to the dynamics and current market conditions of the Washington pharmacy industry a valuation firm should have extensive pharmacy experience. Simple accounting formulas and multipliers will not provide an adequate, or realistic, valuation for a pharmacy business.

Pharmacy buy-sell agreements are extremely important documents in Washington that need to be completed with 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.

Some tips regarding Buy-Sell agreements:
1. Buy-Sell Agreements are important, critical documents that should be taken very seriously. Consult a licensed professional during preparation.
2. Documents need to address the proper laws and regulations which can vary from state to state. Seek proper guidance for WA state laws.
3. Insurance premiums that will fund the buy-sell agreement could possibly be deductible.
4. Ensure that the WA pharmacy valuation is performed by an established Washington pharmacy industry expert.