Strategic Resources for Your Insurance Agency

Acquisition Tax Strategies for Insurance Agency Buyers and Sellers



For both buyer and seller, the sale of an independent insurance agency is a major financial transaction. They both hope to realize substantial profits from the sale while keeping the current and future tax bills low. What should they consider to make that happen?

One variable is the payment terms - the seller can receive the entire purchase price as a lump sum or permit the buyer to pay it in regular installments. There are advantages and disadvantages to each. Mike Ryan, a mergers and acquisitions consultant and certified public accountant, says that sellers may be able to obtain lower capital gains tax rates by taking payment over a number of years. However, “Generally, most sellers don’t want to take the risk of not getting paid and/or changes to the tax law increasing the tax rate on capital gains,” he says.

According to Lou Vescio of Agency Brokerage Consultants and Andrew Rohne of The Center for Financial, Legal & Tax Planning, the seller’s residency should be considered. A seller who lives in a state with an income tax but who will move to a state that does not have one may want to take payment on installments in the short term until residency is established in the new state.

When calculating capital gains tax, the seller must amortise the cost basis (the amount deducted from the selling price to determine the capital gain) over a period of time. Jon Persky, CPA of Optimum Performance Solutions says there is no flexibility here - current tax law requires a 15-year straight line amortization (selling price minus cost, divided by 15.)

Vescio and Rohne say buyers should always keep the amortization expense in mind. “While the amortization expense does not have to be taken each year, most business owners take every deduction when they can,” they say. “They don’t worry about potential tax implications of a future sale.”

Some sellers want to shed the headaches of running a business but aren’t ready to step away completely. Ryan says that the seller staying on as a producer can be a good arrangement for both. “Most buyers would be glad to allow the seller to stay on as a producer,” he says, “provided they are only paying for new business generated by the seller/producer.” He cautions that some buyers may have doubts about the seller’s commitment to the business once he no longer owns it.

Vescio and Rohne say that “the seller may not like having a boss, and the buyer may not like an employee that doesn’t want to have a boss.” However, the arrangement can reduce the buyer’s risk and allow the seller to phase out while keeping clients happy. In most cases, it’s not an issue.

The time of year makes little difference in profitability, Persky says. Closing a deal in January may lock in a lower capital gains rate because ordinary income is lower, but the seller doesn’t get to pocket that ordinary income. “Your maximum savings is 5% on the first $500,000, so you are only saving $25,000 of taxes,” he explains.

Because of relatively low capital gains tax rates, sellers should seek to allocate as much of the sale price to capital gains as possible, Ryan says, while buyers will seek to allocate in ways that give them faster write-offs. If the seller is a C corporation, Persky says that allocating part of the sale price to goodwill can reduce taxes somewhat.

In the end, buyer and seller should work with qualified M&A and tax professionals to ensure that the transaction is profitable and satisfying for both.

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