Do you think we can get a deal done by the end of the year? The answer is always the same. Buyers understand seller’s interest in closing the deal before the end of the year. Advisors should do whatever is necessary for seller’s to achieve their goals. If you begin the process to sell your insurance agency in September or October, you should expect to close by year end. If you begin the process on Thanksgiving, you better cross your fingers. The cycle repeats itself every fall. Why does it happen and is it a good idea to focus on an end-of-year target to minimize taxes?
Sukay & Associates Response
Our reaction to this question is the same whether we begin the process in February or October. Is the Insurance Agency seller mentally and financially ready to begin the process? If the answer is yes, let’s get started. If the answer is “no or I don’t know”, we would highly recommend that a client not proceed with a sale. The success of a sale will not be judged by whether or not the client was able to save 5% on their capital gains rate. If you are getting calls from other advisors who use the end of the year as the reason you need to do a deal, we would suggest that you are talking with the wrong party.
Capital Gains
I do not recall a situation where we were involved in a sale of an insurance agency where the seller was not able to achieve capital gains tax treatment. Our process begins with some easy tax questions. What type of corporation do you have? If you converted to a Subchapter S Corporation, when did the conversion occur? Most of the time, we get the right answers and taxes don’t complicate the deal. Conversions of Subchapter S corporations do create complications, but they do not mean that favorable tax treatments can’t be achieved. These types of companies require very detailed and lengthy conversations with the company’s tax advisors.
I don’t recall a year when we haven’t had a discussion about the “probable increase in capital gains in January.” Insurance Agencies scramble to complete a deal by year end. This creates a large supply of agencies that are being evaluated by buyers. We can never prove that this supply has any impact on multiples, but we suspect that it does have a negative impact on valuation for everyone except for the larger, premium type agencies.
What to Do?
Unless you are in a desperate situation, do not do a deal that will be taxed as ordinary income. As an advisor to insurance agencies, there are plenty of ways to enhance the value of the agency, but it is hard to offset the difference between ordinary income and capital gains tax rates. Once you have decided to proceed with a sale, set up a meeting between your tax advisor and your deal advisor. This will allow everyone to structure a deal that minimizes taxation.
In any event, do not rush to do a deal whose goal is to increase the net proceeds by 5% unless you are emotionally ready to sell your company. We are not minimizing the impact of the difference in a 20% versus a 15% capital gains rate. On a $10.0 million transaction, the impact is $500,000. Our goals are always the same:
- Find the right buyer for our client that allows them to achieve their non-financial goals
- Maximize the Insurance agency’s EBITDA
- Maximize the Deal Multiple
- Minimize the impact of Taxation
The achievement of those goals is just as satisfying in May as it is in December.
How do you know when you are mentally and emotionally ready to sell your Insurance agency? John Biasiello, President of Sukay & Associates, recently discussed this very topic with Oak Street Funding. If you missed his webinar you can download his presentation HERE.
