Buying a Pharmacy

336(e) Common Stock Purchase for Pharmacy Owners

A 336(e) common stock purchase has many advantages for pharmacy owners, but it is a very complex topic. In this video, Ollin Sykes, CPA, and Bonnie Bond, CPA, discuss the benefits of a 336(e) common stock purchase. They highlight the advantages to this purchase, how it can accelerate the process when buying a pharmacy and discuss the legal counsel required when making this purchase.

Sykes & Company, P.A. consults on financing options for pure pharmacy start-ups and existing pharmacy purchases. Learn more about the many aspects to purchasing a pharmacy by viewing our video series.

If you prefer to read this content, the video transcript is below.

Ollin:  Bonnie and I are working with transitioning pharmacies who run into this opportunity quite frequently now we’ve noticed. Essentially this is where you have two types of purchases. One’s an asset purchase. One’s a common stock purchase. So, on the common stock purchase side, if you’re looking at the target being an S-corporation and it’s been an S-corporation for at least five years, then the seller has the opportunity to sell his common stock to you as a potential buyer. You, as a potential buyer, have the opportunity to purchase the common shares at fair market value with respect to the assets. So, it becomes almost like an asset purchase, but it’s not. It’s a common stock purchase and the assets are all valued at fair market value based on your agreement between the buyer and the seller on each tranche of assets whether it’s receivables inventory, furniture, fixtures and equipment, goodwill, script values, etc. There are certain elections that have to be made from a tax perspective. There are certain disclosure information that has to be made from the IRS perspective. But the neat thing here, Bonnie, is that when they do that they don’t have to go through the typical initial start-up phases which I’ll let you kind of touch on.

Bonnie: So obviously, if you have to start a new entity, we see that a lot with an asset purchase, and you have to start applying for all your new DEA license and all of your third party receivable contractors. So that takes a lot of time. And in some states this can take months to a year, we’ve seen. We especially have seen an uptick of this election in states where it can take a long time to get an entity set up because this is a quicker way to get your pharmacy moving with a purchase of this sort. And like you said, it really is a hybrid method of both. So it’s an asset purchase. You get the benefit of that but it’s also really a common stock purchase. There have been elections, Ollin, in the past that are similar to this but it kept you from different type of purchase or different type of set-ups weren’t allowed to do that election But with this 336(e) I believe it widens that scope. You could be an individual you could be an S-corporation, you could be a partnership and be able to take advantage of this election as well.

Ollin: And of course the advantage for purchasing the common stock is that on day one that you own the entity you have the same federal ID number, the same NPI, same NCPDP and typically the same contracts. You just literally exchange a piece of paper, that being the common shares certificates, and all the documentation that goes with the closing typically that you would have. You had the advantages Bonnie mentioned them not having to go through all that initial set-up phase that you would if you were just purchasing assets. That typically can take three or four months to a year in many cases. A lot of legal counsel advice is that you shouldn’t be buying common stock because they’re potential liabilities, but properly structured you can protect yourself as the buyer from IRS, North Carolina or other states, depending on which state that you’re in, Department of Revenue audits, as well as PBM audits for a period of time. With the right legal healthcare that you have engaged in this transaction, which is extraordinarily important to make sure you’ve got experienced counsel in this particular area, you can fully protect yourself with respect to potential contingent liabilities, which is typically the biggest issue for why you would not want to buy the common shares.

Bonnie: And I think you make a good point regarding having good counsel both on the legal side, and with accounting and tax. This is a great election, but we do, Ollin I think you would agree, we’ve seen an uptake with people making this election but as well with the people that we have worked with the seller sides. We do not see a whole lot of people that have had experience with these elections.

Ollin: That’s right.

Bonnie: So it’s really important to be able to do this election correctly. Those books and records of the pharmacy that you’re purchasing is going to need to be up-to-date so that we can obviously value the pharmacy, but also be able to that date of closing we have to be able to allocate the different amounts to the different things that you’re purchasing. So we have to have a firm inventory number, we need to know where receivables are, we have to know where inventory stands, just to name a few payables. They all have to be tied in and agreed upon between both parties on the purchase date. And then obviously the elections that have to be made, the due dates of the tax returns that have to be filed with this election are extremely important.

Ollin: Yep. So in conclusion what we’re talking about here is an option. An option only. It’s one that’s quite complex. You need professional advice on the legal side and the tax side in order to handle this correctly. It’s not something that an inexperienced person wants to get involved in. But it can be some real advantages for a transitioning pharmacist, either as a buyer or seller for that perspective. And it typically serves as a win-win for all involved. If you have questions about it please don’t hesitate to reach out to us we’ll be more than happy to have further discussions with you on this topic.


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