Pharmacy Transactions in South Dakota and Capital Gains Tax

By Brad MacLiver
Authorship and profile at Google


Nearly everything you own and use for personal, or business, purposes is a capital asset. When SD 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 or losses can also refer to investment income that comes up in relation to real assets, such as property, financial assets, and various intangible assets such as goodwill.  All capital gains must be reported with the appropriate tax paid in the United States.

There are specific tax strategies that can be used to help offset the tax liabilities when selling a pharmacy or a drug store in South Dakota.  Unless handled by a professional who handles a large quantity of pharmacy acquisitions, they typically are unaware of these federal regulations that allow for reducing the tax liability for the SD pharmacy owner.

In this period of history where it is not as easy to finance businesses, pharmacy sellers may already have been forced to lower their asking price so a pharmacy buyer is able to qualify for the required financing. On top this, they should expect to pay higher percentages in taxes.

For pharmacy sellers who wants as much money out of the deal as they can get, this is a big dilemma.  For most pharmacy owners in SD, their business is the more valuable asset they will ever own and selling their business at a high enough dollar amount has been part of their retirement and estate planning.  Also knowing they will need to pay a larger portion 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 South Dakota pharmacy owner 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. 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.

One strategy, but not the only one, 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 (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 SD 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 South Dakota pharmacy and drug store acquisitions. 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 SD pharmacy is sold.

************************

Buy-Sell Agreements for South Dakota Pharmacy Owners

By Brad MacLiver
Authorship and profile at Google


When a SD 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.

             
South Dakota pharmacy buy-sell Agreements protect the interest of the parties who own the pharmacy 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 pharmacy.

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

Disadvantages of not having a buy-sell agreement between SD 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 pharmacy business in South Dakota.

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 South Dakota:

1. Stockholders names and the number of shares and voting rights of each. 

2. Guidance for the certified SD 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.

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.

To ensure that the money required is available, buy-sell agreements are often funded with a life insurance policy. Should the death of one of pharmacy owners occur, the life insurance settlement will provide the funds for the remaining pharmacy owner in South Dakota to buyout the partners 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 SD 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 South Dakota 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 pharmacy industry a valuation firm should have extensive pharmacy experience. Simple multipliers and accounting formulas will not provide either adequate or realistic valuations for a pharmacy business.

South Dakota pharmacy buy-sell agreements are extremely important documents that should be viewed and completed with seriousness and care. Even if the pharmacy has a long standing partnership, by the time an event occurs that requires such an agreement, it will already be too late to establish.

Further Tips:

1. Buy-Sell Agreements are important documents that are not to be taken lightly. Make sure to consult a licensed professional.

2. Documents must take the proper laws and regulations into account, which vary from state to state.  Seek the proper counsel.

3. Insurance premiums that will fund the buy-sell agreement could be tax deductible.

4. Ensure that the SD pharmacy valuation is performed by an established South Dakota pharmacy industry expert.