PHARMACY ACCOUNTING ENGAGEMENT SERVICES OFFERED ISSUES TO CONSIDER WHEN BUYING AND SELLING A RETAIL PHARMACY BUYING A PHARMACY SELLING A PHARMACY

Transcription

1 OUR TEAM 1

2 TABLE OF CONTENTS WELCOME PHARMACY ACCOUNTING ENGAGEMENT SERVICES OFFERED WHEN BUYING AND SELLING A RETAIL PHARMACY BUYING A PHARMACY SELLING A PHARMACY PHARMACY BUYER S SIDE CHECKLIST PHARMACY SELLERS S SIDE CHECKLIST PHARMACY BUYER S SIDE DUE DILIGENCE INVESTIGATION CHECKLIST PHARMACY SELLER S SIDE DUE DILIGENCE INVESTIGATION CHECKLIST CONTACT US 2

3 WELCOME A powerful accounting team for independent pharmacies. Sykes & Company, P.A., is the premiere accounting firm for independent pharmacies across the U.S. We have been serving independent pharmacies for over 35 years and are involved in every aspect of their accounting, including tax and business advisory needs of pharmacies and their owners. Our in depth understanding of your industry means that you can trust us to take the accounting and bookkeeping burden off you and free up your time to focus on your business, family and life. We routinely work with clients who want to see their businesses improve and grow. WHAT YOU CAN EXPECT Innovative service with lightning fast response times. Our technology works hand in hand with our get it done attitude to give you results that are faster and more accessible. We use technology in ways that are on par with the nation s largest and most cutting-edge firms. Trustworthy answers and a sense of certainty. We know that your numbers are a crucial piece of your success so we always make sure that they re precise. Then we deliver them to you in a straightforward format that you can understand and use to make real changes in your business. We eat, sleep and breathe pharmacies. We understand how pharmacies work and we know the industry benchmarks so that we can help our pharmacy clients outperform the national averages. We also know that making your pharmacies more successful gives you a better quality of life and we work to make that happen. OUR TEAM We believe in putting our clients needs first and being available to you when you need us. You can always pick up the phone and call us or send us an and you ll get an answer within minutes. We put a cross-trained team to work for you internally so that we have multiple experts up to date on your business. SERVICES The primary focus of our practice is working very closely with independent retail pharmacies and family members of these pharmacy entities to assist them with their compliance, advisory, wealth retention, and estate issues. Our services include: Controllership/Virtual CFO Services Tax Compliance Services Tax Planning Pharmacy Transition Services Pharmacy Business Advisory Services 3

4 PHARMACY ACCOUNTING ENGAGEMENT SERVICES Pharmacy Accounting Engagement Services Offered CATEGORY 1 - MONTHLY ACCOUNTING REVIEW SERVICES AND ON-GOING ASSISTANCE Pharmacy has up-to-date, well-working, established accounting system, and is engaging Sykes & Company, P. A. for monthly accounting review and general advisory services. Client s current accounting file will be converted to a cloud-based QuickBooks accounting environment utilizing Right Networks, an enterprise based hosting service, which will allow secure, 24/7 internet access to the company data files by the client and by Sykes & Company, P.A. Training as necessary will be provided. Initial work may require general review, adjustments, and financial statement format changes. Pharmacy staff handles some or all of cash receipts posting, accounts payable processing, payroll checkwriting, payroll tax reporting, sales tax requirements, etc. internally, or may request that Sykes & Company, P. A. be responsible for some of these duties. In-house controls and established workflow are in place and only need reviewing and/or minor tweaking. Monthly financial statement preparation is performed by client and minimal accounting review and support required from Sykes & Company, P. A. on a regular basis. CATEGORY 2 - MONTHLY ACCOUNTING REVIEW SERVICES WITH ADDITIONAL REQUIREMENTS Pharmacy may currently be using an accounting system that needs updating and/or clean-up work, but otherwise is in pretty good shape. Accounting/financial statement reporting may not be exactly current and tax adjustments not in system. Pharmacy staff needs help in determining daily work controls and flow. Client may not be comfortable with preparing or understanding financial statements and journal entries. Client s current accounting file will be converted to cloud-based environment as explained in Category 1. After initial training, the client handles everything with close supervision from Sykes & Company, P. A. Learning curve on client side is minimal, but may require changes in work patterns and workflow. Financial statements will be prepared by Sykes & Company, P. A. in client s cloud-based QuickBooks file and also available to the client through the client s own secure portal at Sykes & Company, P.A. Client may or may not need direct monthly assistance in keeping the accounting system up to date going forward. Sykes & Company, P. A. may or may not absorb some of the payroll checkwriting reporting and sales tax preparation duties. An additional enhancement of the accounts payable processing management could be interjected using the cloud-based Bill.com payables system as detailed in Category 3. 4

5 PHARMACY ACCOUNTING ENGAGEMENT SERVICES CATEGORY 3 - FULL CONTROLLERSHIP SERVICES Pharmacy does not currently have sufficient in-house accounting/bookkeeping staff in place or business growth has exceeded in-house capabilities. Accounting system may be in disarray and financial reporting is not current. Situation may or may not involve multiple locations/stores. Sykes & Company, P. A. is engaged to provide full Controllership Accounting services and will be the one-source provider for accounting data in-house controls and reporting responsibilities. Client will send daily deposit and sales information to Sykes & Company, P.A. for posting, bank reconciliation, and cash flow management. Client will upload accounts payable invoices for processing to a secure cloud-based accounts payable system called Bill.com, and payments will be processed by Sykes & Company, P.A. as approved by client or based on cash flow availability, depending on the level of participation desired by client. Financial statement preparation will be handled by Sykes & Company, P.A. using the cloud based QuickBooks accounting system and copies of completed statements will be posted to client s secure portal. Client may or may not desire or need access to the accounting system; however, training can be provided. CATEGORY 4 - EXTENSIVE SETUP, CLEAN-UP, AND BOOKKEEPER ASSISTANCE (INITIAL & ON-GOING) Client computer system is either incompetent or out of date. Pharmacy bookkeeper is overwhelmed, behind, and is not maintaining current system. Tax returns may be delinquent; journal entries not prepared and general chaos prevails in office. Client wishes to retain in-house bookkeeping staff, which could require extensive training and assistance. Initial process includes determining exactly where accounting is, what is needed, reviewing prior years, and/or determining beginning point of reconciliation in system. Client s accounting system will be converted to cloud-based system as outlined in the previous categories, then cleaned up as needed. Bookkeeper training will be provided for daily functions and controls, as well as on-going maintenance of accounting file. Sykes & Company, P. A. may absorb some of the payroll checkwriting, reporting, and sales tax preparation duties. Once client is up-to-date, monthly accounting review and assistance and continual support will be provided. Financial statement preparation will be handled by Sykes & Company as outlined in previous categories. CATEGORY 5 - TURBO CATEGORY 4 Basic Category 4 situation turbo-charged with multiple stores, locations and or other extenuating circumstances. 5

6 Issues to Consider When Buying And Selling A Retail Pharmacy BUYING A PHARMACY A. Stock Purchase 1. When purchasing stock, one acquires the stock in the existing company. By acquiring the stock of a company, one assumes the existing liabilities of the company, as well as any litigation. The company characteristics remain the same. For example, if the company was a C corporation under prior management, then it will continue to be taxed as a C corporation. The possibility of double taxation exists at the C corporation level. Prior company benefits, such as retirement benefits, will continue to exist, unless new management terminates them, which could cause employee morale problems. 2. Under a stock purchase, there is no stepped up basis in the assets of the company. Asset values will remain at their historical amounts and will continue to be depreciated as they have been. 3. Increased stock price related to goodwill does not create an amortizable asset. Goodwill included in the value paid for the stock is not depreciable. 4. Buyer due diligence investigation (review of the following areas: accounts receivables, inventories, leased equipment and real estate, intangible assets such as customer lists, workforce, employee benefit plans, income tax returns, contracts review, etc.) should be performed. 5. The buyer should consider buyer s ability or inability to use the selling corporation s net operating loss carryovers, etc. 6. During the year when the outstanding stock is sold in an S corporation, the income, deductions, losses and credits must be allocated among the S corporation shareholders. The general rule for allocating these items is to assign a prorata share of each item to each shareholder based on his/her share of the stock outstanding for each day in the S corporation. Or the shareholders can elect to close the books on the day of the sale and use the specific accounting method to allocate the income, deductions, etc. between the two periods of ownership. In this case, all affected shareholders must agree to the closing of the books. 6

7 B. Asset Purchase 1. The purchaser would organize his/her own company that would then purchase assets from the selling corporation. The new company would not inherit the old company s retirement plan, employee benefit packages, asset depreciation, etc. The new company would, in essence, start from scratch. Upon incorporation of the new company, the decision regarding the type of operating entity to use will be decided. If the corporation wishes to be taxed as an S corporation, thereby avoiding the double taxation issue associated with C corporation, the election to be an S corporation is made by filing IRS Form 2553 by the 15th day of the third month of the initial tax year. Generally, for tax purposes the first $5,000 of organizational costs (including attorney incorporation charges) for the new company are deducted in the tax year in which it begins business and the remaining organizational costs are capitalized and amortized over 180 months. 2. Incorporation allows continuity of life and provides the owners personal liability protection as long as the company has a legitimate purpose and complies with corporate formalities and procedures, but for tax purposes there are two options with respect to entity taxation. a. S Corporation 1. Avoids double taxation with respect to corporate earnings corporate earnings are passed through to the shareholders and taxed on the shareholders personal income tax returns. Shareholder income increases the shareholder s adjusted cost basis of his/ her corporate stock. 2. Losses, deductions, and credits also pass through to the shareholders and are a reduction to the shareholder s adjusted cost basis of his/her stock. 3. Shareholder dividends are treated as a reduction in the shareholder s adjusted cost basis of his/her corporate stock. There is no double taxation. 4. There can only be one class of stock, and dividends should be paid proportionately based on stock ownership. Corporations, partnerships, nonresident aliens and certain types of trusts may not be shareholders in an S corporation. 5. Various states also recognize the S Corporation for income tax purposes. b. C Corporation 1. Pays corporate level income tax. 2. Appreciated assets trigger corporate level tax upon the sale at the corporate level and again to the shareholder upon liquidation or sale of the stock. 3. Shareholder dividends are taxed as dividend income on the shareholder s personal income tax return. 7

8 3. An asset sale transfers ownership of the company s assets to the new owner. Before sale closing, the parties would agree on the allocation of the purchase price. The purchase price would need to be allocated between: a. cash, demand deposits, etc., b. certificates of deposit, marketable securities, and U. S. Government securities c. debt instruments, marks-to-market assets, and accounts receivable, d. stock in trade inventory, e. furniture and fixtures, land, buildings, equipment, and vehicles, f. amortizable intangibles, except for goodwill and going concern value, would include workforce in place, business books and records, business operating system, patents, customer based intangible, supplier based intangible, license, permit or other right granted by a government unit, covenant not to compete entered into in connection with the acquisition of an interest in a trade or business, and any franchise or trademark, and g. goodwill and going concern value. 4. Certain acquisition expenses (attorney fees for the purchase/sell agreements, broker fees, title transfer fees, asset appraisals, etc.) usually are incurred by the buyer and should be added to the cost basis of the assets acquired. 5. Due diligence investigation expenses are treated as Internal Revenue Code Section 195 startup expenses. Generally, $5,000 of startup expenses can be deducted in the tax year in which the business begins and the remainder are deducted ratably over a 180-month period. 6. Both the buyer and the seller of a group of assets that makes up a trade or business must use IRS Form 8594 to report such a sale if goodwill or going concern value attaches, or could attach, to such assets and if the buyer s basis in the assets is determined only by the amount paid for the assets. In addition, the parties would need to provide each other with their federal identification numbers and addresses. 7. The new company would depreciate its newly acquired fixed assets using the purchase price allocated to the assets under the buy/sell agreement. For tax purposes, depreciation would follow the modified accelerated cost recovery system (MACRS) as defined by the Internal Revenue Code. Any goodwill or other intangibles such as covenant not to compete, would be amortized using the straight-line method over fifteen years. Under a stock purchase, you do not get to re-start depreciation; you continue with the depreciation that the Company had been using nor do you get a step-up in cost basis. You continue using the cost basis from the old company. In an asset purchase you would get to value the fixed assets at their current market values (i.e., what you paid for them) and depreciate the assets based on that valuation. In a stock purchase, if the company acquired a building in 1980 for $50,000 and has fully depreciated it, 8

9 then there is no depreciation expense benefit to the new owner, and the adjusted cost basis for the asset is zero. 8. As a new company, the employee benefits may be structured to benefit the owner. However, there are nondiscrimination rules that may apply to employee benefits. 9. An asset purchase normally shields the purchaser from any unknown or hidden liabilities of the seller. 10. Buyer due diligence investigation (review of the following areas: accounts receivables, inventories, leased equipment and real estate, intangible assets such as customer lists, workforce, employee benefit plans, income tax returns, contracts review, etc.). Please note that this is not an all inclusive list of items to consider when buying a business. 9

10 SELLING A PHARMACY A. Stock Sale 1. Stock that is held for more than one year results in long-term capital gain income. Your adjusted cost basis is subtracted from the stock sale proceeds to determine the net longterm capital gain. The tax rate for long-term capital gains is currently 15% (federal). Cost basis for an S Corporation and C Corporation will be different. a. S Corporation cost basis is computed by taking into account the purchase price of the stock, any additional capital contributions, and the company earnings. Distributions and nondeductible expenses reduce the cost basis. b. C Corporation cost basis will include the purchase price of the stock only. 2. However, the alternative minimum tax calculation may kick in. Whether or not this affects your own income tax calculation depends on your own individual circumstances. For example, the tax payments deduction for itemized deductions, which includes real estate taxes and state income taxes, is disallowed for the alternative minimum tax calculation. 3. Collection of the sales price a. Full Collection at Closing The gain on the sale will be recognized in the year of sale. b. Installment Basis or Seller Financing If the sale is financed or collected on the installment basis, then the gain is recognized over the life of the installment agreement. The gross profit percentage, which is the net gain divided by the total sales price, is applied to the principal collections each year to determine the recognized gain for each year. Capital gain treatment would still exist. However, there would also be ordinary income in the form of interest income from the installment sale. The interest factor should not be below-market-rate. The installment note should also be properly executed. 4. The new owner would continue operations of the existing company. All assets of the company would remain with the company. Fixed assets would continue being depreciated as they had been previously. Employee benefit packages would remain in existence. However, the new owner could terminate any employee benefits that they did not wish to provide. 5. Seller due diligence investigation (structure deal to minimize seller s risk, evaluate financial status and character of buyer, evaluate buyer s collateral for deferred payments, nature and amount of seller s transaction costs, etc.). 10

11 B. Asset Sale 1. An asset sale transfers ownership of the company s assets to the new owner. Before sale closing, the parties would agree on the allocation of the purchase price. The purchase price would need to be allocated between: a. cash, demand deposits, etc., b. certificates of deposit, marketable securities, and U. S. Government securities, c. debt instruments, marks-to-market assets, and accounts receivable, d. stock in trade inventory, e. furniture and fixtures, land, buildings, equipment, and vehicles, f. amortizable intangibles, except for goodwill and going concern value, and would include workforce in place, business books and records, business operating system, patents, customer based intangible, supplier based intangible, license, permit or other right granted by a governmental unit, covenant not to compete entered into in connection with the acquisition of an interest in a trade or business, and any franchise or trademark, and g. goodwill and going concern value. 2. Both the buyer and the seller of a group of assets that makes up a trade or business must use IRS Form 8594 to report such a sale if goodwill or going concern value attaches, or could attach, to such assets and if the buyer s basis in the assets is determined only by the amount paid for the assets. In addition, the parties would need to provide each other with their federal identification numbers and addresses and make sure that the Forms 8594 are prepared consistently. 3. In an asset sale, the gain will be calculated differently than in a stock sale. The corporation calculates gain based on the sales price less the adjusted cost basis of the assets. This calculation can yield ordinary income, depreciation recapture income (also ordinary income), and long-term capital gain. These computations can be quite involved depending on the number of fixed assets the corporation owns. 4. An asset purchase normally shields the purchaser from any unknown or hidden liabilities of the seller. 5. Seller due diligence investigation (structure deal to minimize seller s risk, evaluate financial status and character of buyer, evaluate buyer s collateral for deferred payments, nature and amount of seller s transaction costs, etc.). Please note that this is not an all inclusive list of items to consider when selling a business. 11

12 PHARMACY BUYER S SIDE CHECKLIST Consider asset purchase versus stock purchase and the characteristics of each. Consider due diligence investigation procedures. Consider the appropriate type of legal entity to operate the acquired business if buying assets. Consider the use of a valuation professional. Consider consulting or non-compete agreements for former owners and the advantages of each. Consider methods for retaining key employees. Consider developing a written business plan, including capitalization and financing requirements. Obtain tax and employer identification numbers, business licenses, etc., if purchasing assets and starting a new business. Review existing employee benefit plans if purchasing stock. Determine employee benefit plans to adopt if starting a new company and purchasing assets. Determine liability insurance requirements. Prepare corporate documents, if starting a new entity and purchasing assets (corporate charter and bylaws, LLC operating agreement, etc.). Prepare compensation agreements, rental agreements, loan documents, etc. Install accounting and payroll system. Evaluate potential contingent and undisclosed liabilities inherent in a stock purchase. For asset purchases, determine the fair market value of the target s assets and allocate the purchase price. Explore seller-financing opportunities. For stock deals, consider the impact of Internal Revenue Code Sections rules on the buyer s ability to use the target s net operating losses, etc. For asset sales, determine that the buyer s and seller s Forms 8594 are consistently prepared. For C corporations, determine capital structure and owner compensation to avoid the double taxation issue. Consider related party tax rules, if necessary. Identify first year tax elections that should be made. For an asset purchase, set up the tax depreciation schedule using the information from the allocation of the sales price. 12

13 PHARMACY SELLER S SIDE CHECKLIST Consider asset sale versus stock sale and the characteristics of each. Consider due diligence investigation procedures. Consider the use of a valuation professional. Consider consulting agreements for former owners and its advantages. Evaluate the potential impact of retained (both contingent and unknown) liabilities associated with an asset sale. Determine the fair market value of the assets or stock and allocate the sales price accordingly. For asset sales, determine that the buyer s and seller s Forms 8594 are consistently prepared. Consider a covenant not to compete when selling assets. If the seller is a C corporation, determine the effect of double taxation on an asset sale and the tax impact of a liquidation. If the seller is an S corporation, consider the characterization of the pass-through income. Consider financing the sale. Review the buyer s business plan. Consider the tax impact of an installment sale of depreciable assets. (Gain may not be postponed in certain situations.) Consider related party tax rules, if necessary. If selling assets, consider the classification of the assets and related income as ordinary income, capital gain income, or Section 1231 income. 13

14 PHARMACY BUYER S SIDE DUE DILIGENCE INVESTIGATION CHECKLIST Cash Accounts: - Review for cash flow as well as large and unusual transactions in the period preceding the deal. Accounts Receivable, if included in sale: - Review aged accounts receivable schedule. - Review schedule for large account balances as well as time period of the aged receivables. - Determine if receivables have been borrowed against. (A UCC filing search should reveal this.) - Obtain seller representation that all borrowings secured by receivables have been fully disclosed. - Consider ratio analysis of receivables to identify trends. Equipment: - Review repairs and maintenance accounts to determine if needed repair work has been postponed to enhance the income statement. - If equipment is specialized or expensive, consider engaging a professional appraiser to determine value and conditions. - Obtain seller representation that all borrowings secured by equipment have been fully disclosed. - Review insurance policies to compare insured values to values represented by the seller. - Review loss payable endorsements to uncover borrowings secured by equipment. 14

15 Inventories: - Consider taking a physical inventory to establish existence, value and condition. - Compare financial statement inventory values to insured values. - Consider ratio analysis of inventory to identify trends. - Obtain seller representation that all borrowings secured by inventories have been fully disclosed. Leased Equipment: - Review lease documents. - Determine purchase options at end of lease and determine its effect on financial projections, if any. - Determine if leases can be assigned to the buyer. - Obtain seller representations that all leases have been fully disclosed and that operating leases have not been shown on the balance sheet as owned. Real Estate: - Consider engaging a professional appraiser to determine value and condition. - If repairs are needed, consider negotiating a reduced purchase price or charge the seller with making repairs prior to closing. - Consider environmental issues. - Obtain seller representation that all known actual and potential environmental problems have been fully disclosed. - Review ownership documents and zoning restrictions. - Review insurance policies and property tax statements to compare insured values to those represented by the seller. - Obtain title insurance company reports to verify ownership and to determine if there are any liens. - Search public records for property liens. 15

16 Real Estate (cont.): - Obtain seller representation that all borrowings secured by real estate have been fully disclosed. - Determine if favorable mortgages can be assumed by the buyer. Leased Real Estate: - Determine, in writing, if leases can be assigned to the buyer. - Review renewal terms for timing and favorability. - Verify that no outstanding lease payments are due by the seller. - Review the zoning restrictions. - Obtain seller representation that all real estate leases have been fully disclosed and that leased real estate has not been shown on the balance sheet as owned. Intangible Assets (Customer Lists, Workforce, etc.): - Review employee information to determine retention of key employees. Other Items to Consider: - Determine if purchase will result in bargain purchase tax problems. - Consider a UCC filing search and public records search that may provide additional information. - Determine liability for broker s or finder s fee and transaction costs. If Purchasing Stock: - Review prior tax returns, payroll returns, sales and use tax forms, Forms 1099, etc., to help identify any unusual transactions, accounting policies, etc. - Review payroll returns and Forms 1099 to determine if employee vs. independent contractor situations are being properly handled. - Obtain seller representations that all current tax controversies have been fully disclosed. 16

17 If Purchasing Stock (cont.): - Obtain all ongoing tax correspondence from the seller. - Review employee benefit plan documents. - Review existing contracts. 17

18 PHARMACY SELLER S SIDE DUE DILIGENCE INVESTIGATION CHECKLIST Evaluate Buyer s Ability to Make a Deferred Payment Structure Deal to Minimize Seller s Risk: - When deferred installment payments are part of the agreement, the seller should seek as large a down payment as possible. Beware of the tax impact of an installment agreement, especially in the sale of assets. - Seller s willingness to finance the purchase through installment payments should result in an increased purchase price. - Installment payments should reflect an adequate rate of interest. - The seller may wish to consider acquiring a term life insurance policy on the purchaser (naming the seller as beneficiary) for the installment period. Evaluate Financial Status and Character of Buyer: - Obtain buyer s financial statements and understand the funds source that will be used to purchase the assets or stock, either in full or on the installment basis. (Buyer reluctance to disclose personal financial information may indicate potential problems.) - Obtain and evaluate buyer s credit, if financing the sale through an installment schedule. - Obtain written representations from the buyer regarding current loans in default or bankruptcies. - Check public records to determine if the buyer is involved in current litigation. - Thoroughly investigate suits naming the buyer as a defendant in attempts to force payment. - Gather and consider other evidence regarding the buyer s general and business reputation. 18

19 Evaluate Buyer s Collateral for Installment Payments: - Generally, the buyer s stock in the purchased business or the buyer s purchased assets serve as collateral for a financed installment agreement. - A personal guarantee from the buyer should have collateral in order for it to have real value. - If third-party guarantees are to be obtained, verify that the party has adequate collateral identified in the guarantee. Evaluate the Buyer s Business Plans: - Determine adequacy of initial working capital. - Determine if the long-range business plans are actually feasible. - Consider a consulting or employment agreement to assist new management with the continued successful operation of the business. Determine Liability for Broker s or Finder s Fees and Transaction Costs Determine the Nature and Amount of the Seller s Costs: - Verify that these have been considered in determining the attractiveness of the sales prices. Specify who will pay which costs: - The final purchase/sell document should contain information regarding who pays the fees and transaction costs. - If the buyer and seller agree that no broker s or finder s fee should be paid, the purchase/sale agreement should state this. 19

20 OUR TEAM HOW CAN WE SERVE YOU? SYKES & COMPANY, P. A. wants to help you build a rewarding and profitable pharmacy. We are committed to the continuing growth and prosperity of the independent pharmacy. You and your financial wellbeing are our most valued assets. For further information and/or questions about how we can help you immediately, please contact: OLLIN B. SYKES, CPA.CITP, CMA ollin@sykes-cpa.com , ext , ext (cell) (fax) 20