goodwill while the buyer amortizes it over 15 years. In certain situations, this can be an effective method for the transition.
Also, frequently, it is recognized that contracts with principals are terminable on fairly short notice. In such situations, the transition payments are in fact compensation to the departing owner for the maintenance and shifting of those relationships. In this manner, the new agency owners receive a tax deduction and the retiring owner has income at ordinary income tax rates.
Tax Planning
As you might expect, there are a number of tax considerations in terms of the structure. Payments to the selling owner can be properly characterized as wages with the agency able to take certain deductions, such as 401( k) contributions, from these payments. Alternatively, at some point all of the payments can be characterized as deferred compensation. If the proper requirements are met and the plan has been in place for one year, there is a method to save the FICA taxes on these payments for both the departing owner and the agency.
Risk Management Considerations
There are a number of risk management considerations to be addressed. One such obvious risk is the loss of a principal. If so, the shared commission payments are reduced correspondingly by the agreed percentage.
Insurance is always worth examining. It is common for at least term life insurance to be obtained, both on the seller and the buyer of the agency. Health insurance should be addressed as well, at least until the seller is eligible for Medicare.
Conclusion
Long-term, an agency owner looking to maximize the value or payments for the transition of his or her agency can take steps to do so. Developing a diversified portfolio of both customers and principals and building relationships with them will pay dividends in the long run. Much goes into the planning of an effective transition. Keeping an eye on managing risk and tax planning is advisable and will help maximize the value of your agency.
MANA welcomes your comments on this article. Write to us at mana @ manaonline. org.
Tom Kammerait
Tom Kammerait is a shareholder and treasurer at von Briesen & Roper, s. c. in Milwaukee. He has been serving the legal needs of MANA members for more than 20 years ranging from the purchase, sale or succession plans of agencies to contract negotiations and commission collection cases. He maintains a“ no charge” policy for initial legal consultations with MANA members. He is also a Certified Public Accountant( CPA). He may be contacted at( 414) 287-1413 or thomas. kammerait @ vonbriesen. com.