o The present value of invested funds.

o The uncertainty of future market conditions.

Also consider the possibility that your agency's rate of growth could flatten. Essentially, you would then be working harder while earning less.

Many agency owners closely track their growth rate and resolve to sell at the time that rate is cresting. Ask anyone on Wall Street how risky a game it is to attempt such timing in the markets.

When you delay the decision to explore consolidation or disposition of the business, you are betting the future on uncontrollable factors.

Perhaps the biggest factor in the sell-vs.-continue equation is in taxes.

In 2003, the federal government presented agency owners considering a sale with a 25 percent reduction in tax liability--by significantly reducing the capital gains tax rate. The tax rate of 15 percent on long-term capital gains can have a significant impact when compared to the effective ordinary tax rate for a high-earning individual, which could be 39 percent.

Many times, too, the acquiring company will desire--or insist--that the selling principals continue working for the business. Far from being a drawback, this offers great benefits. You can continue to earn income and stipends, and the sale has substantially reduced your personal financial risk.

If agency owners have most of their personal worth tied to their businesses, the timing of a sale may be even more crucial.

In today's competitive landscape, consolidation may be the only way to remain viable--especially in the middle and larger markets, where competition is fierce.

Also, alignment with a larger organization provides professional opportunities for a leadership role within a larger organization. The greatest benefit is minimization or removal of personal risk to the owner by obtaining liquidity for ownership in the agency.

Right now, the low cost of capital is making acquisitions quite attractive, but that equation will change. As banks and second-tier brokers build their networks, the acquisition pace will inevitably level off as supply will be greater than demand.

When it does, market stabilization of product rates will result in very modest, incremental revenue growth--or even declines. Rate declines (market softening) will result in elevated direct expenses and earnings deterioration.

Because the valuation of a business is based upon revenue and earnings trends, such leveling or a decline will certainly mean lower valuations for agencies on the market. This would be further exacerbated by the shrinkage in demand for agency acquisitions among the leading acquirers.

Finally, there is no guarantee that today's low capital gains rate will continue into the future. In fact, there already is speculation that the tax cut would be quickly abolished if a Democrat should be elected to succeed President George W. Bush in the next presidential election.

To fully weigh the options, agency owners must understand the concept of monetizing their agency versus a "steady state" course. The playing field must be equalized to be able to compare the two scenarios.

The net difference can be seen by looking at long-term cumulative results, and by comparing these results on a tax-effected, discounted, present value basis.

To be, or not to be on the market?--that is the question. Whether it is wiser to seek a sale can be objectively compared by creating a numerical pro forma of continuing operations at a presumed growth rate. Assumptions can be made about many predictable elements of the equation.

Comparisons must include these key input variables:

o Current agency market value.

o Current owner compensation.

o Length of employment time for the owner after acquisition.

o Any debt or leverage carried by the agency.

o Presence and stability of any minority shareholders.

o Reinvestment requirements.

Using these variables, the firm's expected growth rate and a market-based approach to agency valuation, projections can be created to compare selling versus remaining as-is.

The following scenario outlines an evaluation using a formula developed to assess sale versus continued operations:

o Begin with the projected net tax-effected cash flow under normal operations for future periods.

o Add the market value of the agency at the end of those future periods (tax-effected and discounted to present value).

o Subtract from this number the current market value of disposition (factoring in any earn-out or deferred purchase), yields earned on invested sale proceeds and post-transaction compensation earned by the principal (all tax-effected and discounted to present value).

o The resulting number will show the value of immediate sale or disposition versus continued operations.

If the result is a negative number, there is deterioration in shareholder value and a merger should be considered.

On the other hand, a positive number supports a premise that the business shareholders would be better served by continuing operations.

To effectively evaluate the assumptions, several scenarios should be modeled.

For instance, assume earnings growth rates (using EBITDA--earnings before interest, taxes, depreciation and amortization) of 5-, 10- and 15 percent. Although some firms show double-digit growth rates going back a number of years, it is not wise to assume those healthy rates will continue forever.

Also, it is best to model several possible sale dispositions, such as the agency selling for 7.5, eight or 9.5 multiples of present annual earnings. These variables will balance the overall impact of a severe, moderate or favorable environment, and thus provide parity in the overall comparison.

Take, for example, an agency with current cash flow of $6.6 million. Assume growth rates and market multiples as mentioned above.

In a baseline scenario (see the accompanying table), we would assume an expected growth rate of 10 percent and a current market multiple of eight-times earnings.

Other factors are reinvestment in growth at 20 percent of earnings and a discount of 18 percent to arrive at present values for cash flows and for the agency.

The bottom line result is a present value of $44.6 million, if the business remains as-is.

For an acquisition model, we would assume a total purchase price of $52.8 million (current cash flow of $6.6 million with a market multiple of eight), paid out by the buyers over three years.

We assumed two more key elements:

o That the principal stays with the business for five years after the sale (at an initial compensation of $400,000, that grows by 15 percent annually).

o That the investment rate for the proceeds from the agency's sale is 8 percent (pre-tax).

The result of this model shows present value to the principal--through the investment portfolio and net compensation--to be $60.4 million.

Thus, in this case, the net benefit of selling versus continuing is $15.8 million. In fact, in this case it would take a sustained 25 percent annual growth rate for the numbers to tip in favor of continuing operations rather than selling.

While this analysis (the numbers are from an actual recent case) showed the wisdom of selling the agency, the next case might show the opposite.

Indeed, every case analysis provides different results. Many times, the shareholders are better served by continuing operations. Before embarking on either pathway, it is prudent to obtain this type of analysis.

Any evaluation must include realistic assumptions and must take into account both tax rates and the value of an investment portfolio.

Once a financial analysis is in hand, intangible factors such as succession planning, risk reduction and uncertainties in the acquisitions market may be considered.

Only then can a sound decision be reached--whether to milk that cash cow, or put it out to pasture.