Watch your assets when selling your pharmacy

Good accounting matters a lot when you’re thinking of selling your pharmacy business. Any smart potential buyer will go over your books with a fine-toothed comb, and if your accounts don’t pass the sniff test, then shoddy accounting could derail the sale of your business – and your plans for life after pharmacy ownership.

We have discussed in previous articles some of the common accounting mistakes we regularly see pharmacist-owners make, and we have suggested some ways to correct them. In this article, we tackle one of the accounting-related errors that can have a very large negative impact on the sale of a pharmacy business and can be very hard to fix – namely, too much cash, investments or other non-active assets held in the company.

These non-active (or redundant) assets can come in the form of cash or investments like stocks, bonds or other marketable securities, but they can also be hard assets like buildings, land or even cars. What we mean by “non-active” is that these assets are not directly related to the operation of the business.  

And if you don’t find a way to get them out of the business, they can spell big trouble when you want to sell.

Why? Here are three big dangers of holding too much in non-active assets within a pharmacy business.

1. They may put your lifetime capital gains tax exemption at risk.

Basically, the lifetime capital gains tax exemption (LCGTE) lets any Canadian realize a capital gain of about $971,190 (as of 2023) without paying tax. When they’re selling a pharmacy, most pharmacy owners want to pursue a so-called share sale, meaning that they want to sell ownership of the company (their shares) rather than just the assets of the company, which would be an asset sale. Thanks to the LCGTE, you can potentially realize up to $971,190 in gain proceeds without paying tax.

But there is a catch. To be eligible for the capital gains tax exemption when you sell your shares, your business must meet the criteria for a Qualified Small Business Corporation, or QSBC for short. There are several of those criteria, but one of the most important is that no more than 50% of the company’s assets can be non-active at any time during the two years before the company is sold. So, if your company’s “active” assets – things like receivables, inventory, equipment and goodwill – ever fall below 50% of the total over that time span, your company might not be a QSBC, and you can’t claim the LCGTE.

The criteria get even more stringent as the sale approaches. In fact, to qualify as a QSBC, 90% of a company’s assets must be active at the time of a share sale.

2. Offloading non-active assets can be taxing - literally.

OK, so you figure out you have a bunch of non-active assets in your company and want to move them out so they fall below the 50% threshold. Good for you. But there’s a catch here, too. Transferring ownership of assets could result in a significant tax bill if it triggers a capital gain – which could happen even if you think it’s a simple transfer.

Thankfully, there are strategies to minimize the tax impact of this so-called “asset purification,” but they can be complex and time-consuming. So it’s important to get advice from a qualified tax accountant before you start moving non-active assets out of your company.

3. They can heighten liability risk.

Most corporations are “limited” because their assets and liabilities are limited to the company itself. So when you hold a lot of cash or investments, in particular, within the company, then they are exposed to any liabilities the company may incur. In the unwelcome event of a lawsuit or a corporate bankruptcy, say, then those non-active assets could be vulnerable to being lost to a legal judgment or to creditors.

As you can see, non-active assets within a company can be a big headache for pharmacist-owners. Our best advice: Don’t put or keep them there in the first place!

But if you do find that non-active assets are building within your business, then it’s time to get some solid accounting advice about how to move them out. Know that the strategies to effectively move assets out of your business can be complicated, and they take time. So don’t wait: the best time to start watching your assets is right now.