Timing can be one of the mostimportant things you need to consider when you're thinking aboutselling an agency. Why? Because the current capital gains tax rate(through the end of 2010) is at a historical low rate of 15 percentfor the higher marginal income tax rates. While it's unclearwhether the capital gains tax rate will rise over the next two tothree years, it's a safe bet that it will not go down.

Assuming Congress takes no action in 2010, under the existinglaws, the capital gains tax rate will automatically increase to 20percent on January 1, 2011 for a whopping 33 percent increase.

So how does this affect owners ofretail insurance agencies, MGAs, and MGUs who are contemplating apotential sale or creating a perpetuation plan? Capital gains taxescan dramatically impact on what you "take to the bank."

For example, if you assume risk in the transaction's ultimatevaluation by taking some form of contingent payments, you'resubjected to numerous factors beyond your control. These caninclude changes in local and national economic conditions, carrierunderwriting and investment results, insured losses that impactcontingencies or profit sharing, soft market pricing, requiredtechnology upgrades, and the prevailing capital gains taxrates.

Out of this list, capital gains are the one problem you havesome control over. A capital gain is the profit realized from thesale of a capital asset. Capital gains occur any time you sell anasset that has appreciated in value. A capital gain is measured bythe difference between the net sale price of the asset and yourcost basis in that asset. The cost basis is typically defined asthe amount you initially paid for the asset, adjusted fordepreciation, the cost of improvements, and various otherconsiderations. In many cases, the cost basis for an agency is verylow resulting in most of the net proceeds of a sale being taxed atthe existing capital gains rate.

Furthermore, the capital gain upon which the tax is calculatedis not adjusted for inflation. Thus, a gain that is entirely due toinflation is not a real gain at all. It's an illusory gain which istaxed at the prevailing rates.

The good news is that the seller decides when to pay the capitalgains tax. As a seller, you can defer this tax indefinitely if youtake no action or defer your payout. The impact of this "lock-ineffect" is easy to measure from one year to the next, but becomesincreasingly harder to calculate over longer periods of time. Belowis an example as to how the capital gains tax can impact net salesproceeds. It illustrates the required operating improvements aseller must achieve in order for the sale of your agency to be taxneutral when compared to the current 15 percent capital gains taxrate.

As the above example illustrates, the impact of rising capitalgains tax rates has a significant impact on the net proceeds thatare "bankable" to a seller.

With higher capital gains taxes lurking in the future, youragency must either grow its revenues and/or improve its profitmargins just to net the same proceeds under the current tax rates.This is a difficult task especially when many agencies arereporting no real organic growth. The ever increasing demands forimproved agency performance calls for a risk/reward analysis thatevery agency owner should undertake on a routine basis.

Before you take any action, it is highly recommended that youconsult a professional M&A firm as well as your tax advisor asto transaction structure, timing, consideration used and numerousother factors which could influence your "money in the bank."