Author: Al Diamond

When the current owners wish to perpetuate the agency without severe financial impact to the new owners, they sometimes attempt to gift, discount or bequeath ownership interest instead of charging full value for the agency’s stock and, thereby causing a taxable event to the existing owners while forcing the new owners to pay for the stock with after-tax dollars.

Most agencies in the United States still perpetuate from one agency owner to another. The owner internally perpetuates to either family members or to trusted employees who will become the agency’s next generation of owners. When the current owners wish to perpetuate the agency without severe financial impact to the new owners, they sometimes attempt to gift, discount or bequeath ownership interest instead of charging full value for the agency’s stock and, thereby causing a taxable event to the existing owners while forcing the new owners to pay for the stock with after-tax dollars. Although we must fund our national, state and local governments, it becomes onerous to build a strong asset with after tax funds, and then be taxed in both directions to transfer that ownership from one generation to another.

The problem lies in the concept of ‘sweat equity’ of the new owners being perceived as the ‘Silver Spoon’ syndrome. This syndrome exists when a set of owners work to build a business and transfers that business to new owners who don’t pay the same price in time and effort as the former owners. Sometimes the new owners become Maintenance Agents while the former owners were builders and growers of a business. The new owners certainly appreciate the value being given to them, but are more likely to view it as a valued asset to use or sell to their best benefit while the old owners saw the asset as the building blocks of their and future generation’s business asset.

A good example is that of a dairy farmer who starts a farm with borrowed money to establish a new herd. Over time with good husbandry practices, that herd breeds and grows and both the production and asset value of the dairy farm grows. When the time comes to perpetuate the farm, the farmer permits his children to take over the farm and he retires. The children “might” see the farm as a going concern with a large asset value and could work to maximize income by selling the herd’s offspring as well as the production of the herd. They might not continue to build the herd and the value by reinvesting in the farm as their predecessors did. Similarly, agency perpetuators who maintain, rather than continue to grow their agencies as their predecessors did, are more likely to view it as simply as a valued asset. If the natural decline occurs from retention losses without new client growth, they may consider the agency as a declining asset that should be sold while still valuable.

The agency originators saw the agency like a farm, to cultivate and plow and invest into for the future. The Silver Spoon generation sees it as an existing asset to protect or to cash out if a good offer is provided. We have a way for an agency to perpetuate itself in a tax beneficial way but to incent the new generation of owners to continue the agency’s growth in both commission income and, more importantly, in client numbers in order for them to take advantage of their predecessors generosity.

Within the contract from predecessor owners to new owners a section exists that provides for the requirement of actual purchase of the former owner’s stock in a logical sequence IF growth does not occur in any year subsequent to the perpetuation.

We invite you to contact us to assist you with your agency perpetuation needs, whether it is imminent or needs to be considered any time within the next five years. Our perpetuation programs are designed and tailored specifically to the needs of the individual agency and could include this penalty section to guard against the Silver Spoon Syndrome as well as tax beneficial concepts that fairly and legitimately avoid paying more taxes than you need to in order to perpetuate your agency.

Call us at 800-779-2430 or e-mail us at info@agencyconsulting.com to have Al or David Diamond call you or read more about this and any other of our many services and products at www.agencyconsulting.com.

Copyright 2010 by Agency Consulting Group, Inc. Used with permission.