Pharmacy Transactions and Capital Gains Tax in Montana

By Brad MacLiver
Authorship and profile at Google


Virtually everything you own and use for personal, or business, purposes is a capital asset. When MT 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 Montana 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 MT 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 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 in Montana 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 Montana pharmacy owners to reconsider their retirement plans. The good news is there are financial tools and strategies that allow the 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 then set up for a period of time that is predetermined or until the donor’s (the Montana pharmacy owners') death.  An individual (the MT pharmacy owner or family member) can then receive income from the Trust’s assets, and upon the donor’s death, those assets will go to a designated charity. A portion of the income from the Trust can be utilized to purchase life insurance for the donor. The proceeds of this life insurance then to designated heir(s) who will receive the money without incurring any estate tax liability.

These various tax strategies like the use of CRTs are not widely known.  It is recommended that pharmacy business owners be aware of the different tools available when structuring a business transaction. They should also keep in mind that only professionals with vast experience in CRTs should be used to setup a Charitable Remainder Trust.  Failure to follow the strict IRS guidelines could cause increased taxes, penalties, and criminal charges in some cases.

Throughout the years, there have been some unscrupulous individuals who have attempted to use CRTs and similar financial tools in illegal scams.  Because of the increase in capital gains taxes, there is an expectation that more scams will be floating around out there.  Pay attention to that possibility and make sure to be confident that 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 pharmacy owner large sums of money when a pharmacy is sold in Montana.

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Buy-Sell Agreements for Pharmacy Owners in Montana

By Brad MacLiver
Authorship and profile at Google


When a MT pharmacy is owned by at least two people, the stockholders or partners should have what's known as a Buy-Sell Agreement. This agreement is a written document that specifies the procedures for and governs the future sale of the pharmacy business.
               
The pharmacy buy-sell Agreement in Montana protects the interest of the parties who own the pharmacy and specifies the actions triggered by a stockholder leaving the business due to their death, disability, dissolution, retirement, or divorce.  It governs how and when shares of the pharmacy business can be transferred or sold and it also provides guidance as to how the pharmacy will be valued.  It also outlines the obligations of the remaining shareholders of the Montana pharmacy.

These agreements are important because the elements of a future sell will be predetermined and there will be no need for negotiation during a heated dispute or grieving period. It provides a level of comfort and assurance that the process was thoroughly planned to both the stockholder and the family when the inevitable time comes for an exit strategy.

There are disadvantages to not having a buy-sell agreement between pharmacy owners.  A disability potentially leaves one partner working more while another is not adding any productivity.  In the case of a death and there is no agreement, one partner may be stuck with a non-productive heir, or a new partner may be inserted who has a conflicting personality with the remaining partner.  An incompatible partner could be disastrous for the pharmacy business in MT.

Buy-sell agreements come in several forms, 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 Montana Buy-Sell Agreement:
1. Stockholders names and the number of shares and voting rights of each. 
2. Guidance for the certified MT 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 Montana pharmacy owners occur, the life insurance settlement will provide the funds for the remaining pharmacy owner 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 Montana 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 pharmacy business valuation is needed in Montana. 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 Montana pharmacy experience. Simple accounting formulas and multipliers will not provide an adequate, or realistic, valuation for a MT pharmacy business.

Pharmacy buy-sell agreements are extremely important documents 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.

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 Montana pharmacy valuation is performed by an established MT pharmacy industry expert.