When considering the sale of their brokerage, most insurance agency owners focus on the valuation of the business and finding a qualified buyer for the transaction. Understandably, their primary objective is to pocket as much profit on the sale of their agency as possible. After all, they likely spent the better part of their career building the business from the ground up, and they want to ensure that the capital and sweat equity they put into growing their agency ultimately reaps a harvest. What many brokers fail to consider, however, is the impact that the assignment of the selling price will have on their tax bill.

Most insurance agency sales transactions are an “asset sale” (as opposed to a “stock sale”), which can fall into one of seven asset classifications for deemed or actual asset acquisition. These include cash and cash-like assets, securities, accounts receivable, inventory, and certain intangible property (e.g., business books and licenses), among other asset categories. Because both the buyer and seller must attach IRS Form 8594 to their respective tax returns for the year in which the business transfer occurred, they must come to an agreement on how the purchase price is to be allocated among classes of assets.

The terminology for the various asset class categories can be confusing, and each one carries with it different tax implications. Determining the proper categorization for your sale transaction will depend in part on how you and the agency buyer both wish to apportion the selling price. One category may benefit you as the seller more than the buyer, or vice versa, and finding a happy middle ground when the two parties’ financial goals are in direct conflict can be tricky.

Before making any hard and fast decisions related to the sale of your insurance agency, you should meet with an experienced CPA or tax lawyer who has expertise in these types of transactions. They can explain to you the pros and cons of assigning the selling price to the different asset class categories and help you determine the most advantageous approach, as relates to your potential tax liability.

In addition, working with a seasoned insurance industry business intermediary, like Springtree Group, can help ensure that you address important financial issues well in advance of deal negotiations. In addition to considering the assignment of the sale, your business broker can help vet prospective buyers and arrange financing to ensure that the transaction goes through smoothly. All too often, deals fall through because the buyer was unable to secure the needed capital for the agency acquisition, or has an unreasonable expectation that the owner will help finance the deal.

To learn more about the financial and tax considerations involved with the transfer of an insurance agency, contact Springtree Group by sending an email through our online form. We will be happy to assist you with all of your acquisition, perpetuation and business transfer needs.