Preparing your pharmacy for sale
01 Nov 2016
Jason Bradshaw FCA, Director of Corporate Finance at PKF O’Connor Leddy & Holmes Limited, discusses important issues to consider when preparing your pharmacy for sale
The title of this article might have you thinking that you can prepare for the sale of your pharmacy maybe 2-3 months in advance of placing it on the market. This may be true in some instances. What if I told you that in other cases, from a taxation point of view, you should be preparing for the sale of your pharmacy up to 10 years in advance? Does this surprise you? This timeline of 10 years would be applicable, for instance, in relation to being able to avail of Retirement Relief, beneficial matters that you can implement now that may save you substantial amounts of tax in the future.
There are other matters that you can also address to make your pharmacy more attractive to a purchaser and while focusing on the bottom line of your business will help you to increase the sales price, there are some key points that you should be considering in relation to preparing your pharmacy for sale.
Incorporation of your business
The vast majority of pharmacies in Ireland today operate through a limited company structure.
However, there are in excess of 60 pharmacy businesses that are still operating in unincorporated entities, i.e. Sole Trader or Partnerships. If you are one of the pharmacy owners operating as a Sole Trader you should consider incorporating your business for a number of reasons:
- A limited company offers you limited liability (to you personally).
- Contributions to a company pension scheme are substantially higher.
- A review of the Income Tax at the time of incorporation of your business should be undertaken in order to ascertain any favourable Income Tax position.
- The Purchaser of a Sole Trader business pays 2% Stamp Duty on the value of the transaction versus 1% Stamp Duty on the sale of a limited company.
- The utilisation of Retirement Relief on the sale of your shares in your company (including cash reserves).
For the remainder of the article, it is assumed that the pharmacy trades through a limited company structure.
Review Your Corporate Structure (Holding Company)
A review of your Corporate Structure should be carried out. There are a number of points to consider and be aware of in relation to planning for the future sale of the business:
- The setting up of a Holding Company may be worth reviewing in some circumstances. This would entail transferring the shares held in your personal name/s to a brand new ‘Holding’ company which would, in turn, own the shares in your pharmacy trading company. You would then own the shares in the Holding Company.
- There are a number of benefits to a Holding Company structure, such as participation relief, which means that if the Holding Company sells the shares of its trading company, the proceeds can be held tax-free until you either sell or liquidate the Holding Company. You could then use the proceeds held within the Holding Company to make other investments.
- The Holding Company structure is useful and beneficial if you do not need the proceeds of the sale in your personal name for a period of time into the future.
Shares of the company held between spouses - retirement relief
In my introductory paragraph, I referred to a scenario where you may have to plan 10 years in advance before you can sell your company in a tax-efficient manner. This section is relevant in carefully examining the shareholding of your business.
A major relief that may be available on the sale of your shares in your company is called ‘Retirement Relief’. Some of the main points to note to be able to claim Retirement Relief is as follows:
- Tax-free sum of €750k (if younger than 66 years) or €500k (if older than 66 years) per qualifying individual, assuming certain conditions are met. Some of these conditions are that you hold a specific level of share capital in the business and that you were a Director for at least 10 years, of which 5 years have to be fulltime before the sale of the company took place. You must be over 55 years of age.
- If both spouses are working in the company, they should both be Directors and own shares in the company to qualify for Retirement Relief. The transfer of shares to a spouse should be carried out before the transferor reaches the age of 55 years old as this will not affect their Retirement Relief tax threshold.
- If the Retirement Relief conditions are satisfied for both spouses, the tax-free threshold for two individuals would be €1.5 million (if younger than 66) or €1 million (if older than 66).
The freehold property (if applicable) can either be retained in your personal name or held within the limited company. The majority of pharmacy transactions involve the acquisition of a leasehold interest where the freehold is either retained by the vendor or where the landlord is unconnected; there is no golden rule in relation to whether you should retain or sell the freehold property. The main points to consider here are from a commercial, legal and tax perspective. The two options are:
- If you are preparing to sell your business, you can retain the property in your personal name and create a lease with an annual rent charge to the pharmacy trading company. This means that you will receive rental income in your personal name and are therefore liable to Income Tax on the net rental income at your marginal rate (currently 55% over €100k).
- A commercial decision might be to sell the freehold property into your trading company. The market value of the property should be established by a local auctioneer and this value will then determine the sale price. Stamp Duty will be payable at the rate of 2% on the market value of the property. There are also Capital Gains Tax implications to consider. If there is a bank loan outstanding on the property, you should discuss the implication of the finance facility with your bank. The company would repay the outstanding sales consideration to you from its trading profits.
Consideration needs to be given on transferring any investment assets or excess cash in your trading company before putting the company on the market. A restructure may be required prior to sale. Investment assets might include land or buildings not relating to the business. A potential purchaser will not be interested in taking over these assets. In addition, the company may have considerable cash reserves that you will retain. A full review should be carried out in advance.
Increase maintainable EBITDA (adjusted profits)
Pharmacies are now valued on a multiple of maintainable EBITDA (Earnings Before Interest Tax Depreciation and Amortisation). With this in mind, you must focus on increasing your EBITDA so that you can maximise your sales price. You should consider carrying out a root and branch review of your business to identify how to increase turnover and reduce your overheads. Every €1 of additional profit could be worth up to €6 in relation to the sale price of your business.
It is imperative that you plan for the sale of your business well in advance, in some cases up to 10 years in advance. It may be wise to engage the services of a Chartered Accountant with specialist knowledge of the retail pharmacy sector so that a review of your business can be carried out. A detailed tax review would also need to be undertaken. By planning for the future now, you can make very significant increases to your retirement fund.
Jason Bradshaw is Director of Corporate Finance at PKF O’Connor, Leddy & Holmes Limited. Jason specialises in providing advice on the sale and valuation of pharmacies, acquisition of pharmacies and retirement planning advice to the retail Pharmacy sector. Contact details: firstname.lastname@example.org / +353 1 496 1444 / www.pkf.ie.
There are a number of tax areas briefly discussed in this article. A detailed tax review would need to be conducted before any transaction is undertaken to advise on all tax implications of the proposed transaction and the tax reliefs that may be available