Canada’s pharmaceutical industry is both strong and relatively small, with about 14,000 pharmacies and drug stores throughout the country. In part 1 of our 2 part series, we explore the dos and don’ts of selling your pharmacy.
Selling a pharmacy is more complicated than most business sales, mainly because the market is smaller, as is the pool of potential buyers.
Canada’s pharmacies and drug stores are a mix of independently owned businesses and chains, including large banners like Shoppers Drug Mart Corporation, McKesson Canada, Metro Inc. and Pharmasave.
Whether you are an independent looking to sell to another pharmacist, a chain or a consolidator, there are several things to consider when it comes to the tax ramifications of how you structure your sale. There are also several key things your accounting team can do to guide the sale and ensure potential buyers understand the full value of your pharmacy.
Let’s start with structuring the sale:
Before beginning the sale process, it’s important to decide whether you and the buyer would prefer an asset or share sale.
In an asset sale, the seller retains control over the corporation, while the buyer purchases the different assets of the company. Assets can be classified as tangible (buildings, equipment, cash and inventory) or intangible (goodwill, customer lists).
Generally, buyers prefer asset sales as they are a ‘cash-free, debt-free’ transaction. The sale generally does not include cash and the seller often retains any long-term debt obligations. Normalized net working capital is also usually included in the sale, consisting of accounts receivable, inventory, prepaid expenses, accrued expenses, etc.
Pros to an asset sale:
In an asset sale, losses from the business can be used against taxable income from the sale, or future income. Canada’s capital dividend account allows shareholders to receive a portion of the gain on the sale, tax-free.
Cons to an asset sale:
Because the capital gains exception only applies to the sale of shares, you will be unable to use it and taxes on your gross capital gain will be higher. Additionally, all corporate filings and regulatory paperwork for the year of sale will need to be completed, even if the business has no activity.
If the business is incorporated, both parties must agree on whether to structure the deal as an asset sale or a stock sale. Sellers are often more motivated by a share sale because it is simpler. The buyer is purchasing shares in the business and obtaining ownership of the entire legal entity, so multiple separate agreements aren’t needed to transfer ownership of each individual asset. All of the business’s liabilities are included in the sale, so the seller has no further responsibility.
Pros of a share sale:
In a share sale, it’s possible to utilize the Capital Gains Exemption, which saves hundreds of thousands of dollars from being taxed on the sale of small business shares. Each shareholder, including family members, can use this deduction. And regulatory paperwork and corporate filings do not need to be completed for the year of sale.
Cons of a share sale:
Unfortunately, there’s only one perk per sale type. Since the capital dividend account only applies to the sale of shares, you can’t use it for any gains on the sale, and therefore cannot access that money tax-free. You may also need to purify any non-active business assets from the corporation – like excess cash, investments, securities or real estate – prior to the sale. This can increase costs and is time consuming.
How to enhance your sales prospects?
Pharmacy sales experts will tell you the same thing: having easy-to-interpret financial information for the last 3 to 5 years readily available for the buyer to review can help prove the value of your pharmacy. Pharmacies may be overvalued by owners or undervalued by buyers, and having accurate financial information prepared by an accountant can help both parties reach a mutually beneficial sale agreement.
The buyer and their lender will most likely want to review tax returns, profit and loss statements and balance sheets. To properly value your assets, you should do a full inventory count. This way you can further present reports detailing average script prices, number of refills, new fills and top 100 drug sales.
Importance of creating an exit timeline when selling a pharmacy
Don’t rush the sale. Pharmacies are a specialized market, so naturally, there are fewer buyers than in the average commercial real estate industry. Plan ahead and assume both a longer time on the market, a longer time to close and a longer handover period to adequately train the new owner. Setting a target date for the sale will give you time to navigate all the necessary steps in the process, without rushing the sale and making costly mistakes that will hurt your succession planning.
Succession planning, or deciding who takes over your business, is linked with tax implications. Keep in mind that the rules are different if you sell to a third party vs. a family member. Different tax structures can impact capital gains, dividend rates and income tax, so it’s important to think about both the sale and succession planning together.
Accounting for all the details
There’s a lot that can go wrong selling a pharmacy, but a Zeifmans professional, with decades of experience in healthcare accounting, can help you successfully navigate all of these issues. In fact, we’ve helped over 300 pharmacies, just like yours.
From structuring the sale to creating financial statements to prove value to integrating succession / tax planning, accountants have an important role to play in ensuring the financial success of your pharmacy sale. Contact us to get the process started.