Strategies To Avoid (Not Evade) Taxation In The Perpetuation Or Succession Of Your Agency

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Strategies To Avoid (Not Evade) Taxation In The Perpetuation Or Succession Of Your Agency


You buy an agency and elect to buy the Assets, not the stock.  In this way you don’t necessarily purchase the agent’s liability for prior acts.  That liability is associated with the entity itself; so, if you don’t formally acquire the entity through a stock sale, you avoid that issue. 

An asset sale also allows the buyer to amortize the goodwill purchased (the majority of any agency acquisition) over a 15-year period standardized by IRS Ruling.

Then you eventually sell your agency, either internally or externally.  The buyer wants to amortize (write-off) part of the purchase price each year and gets a stepped-up basis if he buys your assets instead of your stock.  Most internal perpetuation is still done by stock sale which means that the new owner simply buys your stock with after-tax dollars.  In this scenario (sale of stock) the seller pays capital gains tax on the gain in value above his “basis” in the agency (zero if he started from scratch, more complicated if he bought other agencies along the way – consult with your accountant for more details).   So the treatment result in the use of after-tax dollars from the buyer, Capital Gains taxation for the seller, and the assumption of the seller’s basis (and potential liabilities of the agency) for the buyer.  This is the worst case scenario for the buyer and best case scenario for the seller.

An Asset Sale is often perceived to be a better alternative for the buyer because of the benefits noted above.  But one potentially major problem with an Asset Sale is that, upon future sale of the agency’s goodwill (it’s book of business as part of goodwill), the buyer must recapture all amortized write-off as ordinary income, all taxable in the year of the sale. 

This is a daunting problem that could stop agencies from acquiring other agencies if they are facing their own perpetuation soon.  But there are solutions that would offset the potential tax problems.  The only issue is that you can’t structure the transaction with intent to evade taxation.   The IRS will come after you and likely prevail.  The transaction should be defined by the needs of the buyer and of the seller.  The eventual tax effect should only be a by-product of your unique and specific valid reasons for a transaction.

For instance, if you determine that an acquired book of business should remain isolated in a separately owned entity (separate from the rest of the host agency), that company, who was amortizing the book of business, may be acquired as an intact stock sale (for the remaining purchased book of business); while the rest of the agency could be sold as an asset sale if that is the best solution for the buyer.  Isolating the acquired book of business for cash flow reasons, for retention-based transactions and for servicing and potential payment basis to the seller are valid reasons for this treatment of an acquired book of business.  A side benefit could be that you won’t necessarily have to recapture amortized amounts if you re-sell that company as a stock sale.

We are also replacing many stock sale internal transfers from one generation of agency owners to another, with instead and “account servicing agreement: between the host agency and a new firm formed to benefit the arising owners by avoiding paying for the business that they personally generate and own.  Building their own book of owned business is the new agency owners’ reason for maintaining separation from the host agency.  If Agent A no longer wants to run his agency and wants to devote his time to customer relationship management duties only, Agent B can certainly contract with Agent A to service Agent A’s book of business.  They will negotiate how much of Agent A’s commission will be needed to service and administer Agent A’s book of business.  Agent A never loses ownership of his clients and is free to continue to sell and grow that book of business or take more time off knowing that Agent B stands ready to service Agent A’s client base in his absence.  Somewhere, down the line, Agent A may sell or transfer ownership to Agent B (or to whomever he desires).  This may even be done as a bequeathal if Agent A continues to maintain his client relationships until his death. 

Under these circumstances, Agent A’s recapture of amortization may be effectively delayed or eliminated in the course of time.  Agent A did not initiate this transaction in order to evade taxation.  He simply wanted to concentrate his efforts on what is most enjoyable to him and he needed an organization to handle the day-to-day administrative and marketing tasks associated with the management of his book of business.  This strategic plan for Agent A continues to maintain his asset under his ownership and control until such time as he wishes to cash it in or bequeath it to others.  He does not give up his rights to sell his agency and may increase the book of business through his continued sales efforts or allow it to remain stable or deteriorate if Agent A does not retain his clients well.  This methodology can be equally effective whether Agent B comes from Agent A’s own agency to create the new entity, or if Agent B is a foreign agency.

The difference between avoidance of taxation (a side benefit if the form of transaction happens to allow for lower taxation) and evasion of taxation (a purposeful action simply for the purpose of evading taxes, frowned upon by the IRS) is your intent.

We are available to agencies throughout the U.S. to help them create Succession and Perpetuation Plans that will adhere to the goals of both the perpetuator and the host agent.  Call us to arrange for a consultation for that purpose 800-779-2430.  And always include your accountant and attorney in the conversation of your goals for the transaction including our recommendations for solutions.  We will include these professionals in our recommendation wrap-up because it is far better to have your local professionals on-board and understanding the strategy and the tactics of any form of transaction rather than trying to educate them after the fact.

Remember, there are as many ways of perpetuating businesses as there are businesses in the U.S.  Defining your reason is the first step in perpetuation and can affect who you deal with and how.



Al Diamond


Agency Consulting Group, Inc.