A free checklist from Agency Checklists on the eleven points to consider when purchasing an insurance agency whether in Massachusetts, New England, or beyond. Oftentimes the right legal counsel can help navigate an owner smoothly through this process avoiding many traps for the unwary.
1. What is being bought and sold? It’s likely more than just the expirations.
Are you buying and selling stock or assets? If assets, the agreement should list of all assets that are included as well as those that are specifically excluded. The expirations are likely the largest asset but don’t forget about physical property such as the computer software that you may need to access the expiration records. Also include intangibles such as the right to use telephone numbers, fax numbers, web addresses and the name of the selling agency.
2. There’s more to the purchase price than just a number.
No one forgets to include the purchase price in the agreement but don’t forget about other critical terms such as how it will be paid, when it will be paid, consequences and remedies for non-payment including a security interest in the assets, etc. The variety of payment methods and terms are only limited by your imagination. See our ____ checklist for some examples. Also, include how the parties will allocate the purchase price for the purpose of filing tax returns.
3. “I promise ….” Representations and warranties by the seller and the buyer.
The agreement should include representations and warranties, e.g. promises made by each party that certain things are true. For example, the buyer will want the seller to represent and warrant that the seller was licensed and authorized to transact business as an insurance producers at the time that expiration policies were issued and that the seller has not received a significant number of notices of intent not to renew within the past twelve months thereby reducing the value of the assets sought to be purchased. The seller may want a corporate buyer to warrant that it is authorized to make the purchase and that there is no litigation or other proceeding that might hinder the buyer in completing the transaction or making payments on any note.
4. Representations and warranties won’t do you any good, if there are not consequences for their breach.
The agreement should include an indemnity provision that requires the breaching party to reimburse you for any damages, losses, taxes, fines, costs, and attorney’s fees that you might suffer as a result of a breach of any representation. For example, if the seller warranted that no other producer had any ownership of any of the expirations, and that turned out to be false and the producer sued the buyer, the seller would be required to indemnify the buyer for damages. In order to ease the collection of those damages, the agreement might include a right of set-off against installment payments of the purchase price.
5. What about Sally, Dick and Jane? Consider the rights and obligations of former employees, producers and others.
First the buyer should verify (and the representations and warranties should state) that the current and former employees of the seller have no ownership interest in the assets and that the expirations were produced directly by the seller and not through a brokerage or any other agreement. A buyer will also want to know whether the seller’s employees and producers are subject to written non-solicitation, non-disclosure or non-compete agreements and the specific terms of those agreements. The value of the assets can diminish quickly if a former employee solicits away the business.
6. Will the buyer need the cooperation or help of the seller after the sale?
Depending on the size and complexity of the book of business purchased and the relative knowledge of the buyer and seller, the buyer may require only the cooperation of the seller post-sale or may need more substantial assistance. The agreement should require the seller’s cooperation and define the extent and time period for the cooperation. Alternatively, the buyer and seller may wish to agree to enter into a consulting arrangement which sets forth specific duties and compensation.
7. “He’s stealing my business!” Non-competition, non-disclosure and non-solicitation provisions.
Once the buyer has purchased the book of business, he will want to protect himself against competition, solicitation and disclosures by the seller that could erode or destroy the assets just purchased.
8. Don’t get left holding the bag. Protect yourself with indemnity provisions.
In addition to an indemnity provision protecting the parties against breaches of the representation and warranties, it is wise to include indemnity for other losses that may arise from errors or omissions of the other party. Even if you are not liable, you may get sued for the actions of another. Therefore, the indemnity should include reasonable attorney’s fees as those can sometimes exceed the actual loss.
9. Settling up.
The payment of commissions and accounting for return commission occurs on a continuously rolling basis. The agreement should include clear terms as to the allocation of commissions due or payable, the responsibility for return commissions, expenses, costs and liabilities and absolute dates for such and the manner in which such accounts will be settled. Attention to details such as this in the agreement will help to avoid disagreements and misunderstandings after the closing.
10. Who will tell the clients about the purchase and sale? Where will the mail go? Transitioning the business.
In order to transition the business smoothly, the parties may wish to include agreements regarding how and who will notify the customers of the purchase and sale, and other matters that may impact the transition of the business such as the transfer of phone lines, forwarding of mail, removal or placement of signage at the former agency location, etc. Addressing these matters early on will help make for a seamless transfer of business.
11. Interact with any insurance carriers whose contracts are material to the sale before you buy
An agency’s insurance companies do not like to be taken for granted in an agency sale. Most agency agreements have provisions for notifying the insurance carrier when an agency’s assets are sold or when the agency merges with another agency. The agency agreement often will state that the agency contract will terminate if the insurance company does not agree to the sale, merger or asset transfer. If the continuance of one or more of the agency contracts held by the agency being sold is material to the deal, contact the companies involved with the written permission of the seller and ensure that the a new contract will be signed with the agency’s new owner. If the continuance of one or more of the agency’s contracts with particular insurers is a condition precedent to the deal, spell that condition out in both the letter of intent and the purchase and sale agreement.