The sale or purchase of an independent insurance agency may be the largest financial transaction the seller or buyer may experience. The negotiated price and financing structure are major parts of any deal. Just as important, however, are the terms and conditions of the sales contract.
Agency acquisition contracts have become more sophisticated over the last several years, says Dirk Beamer, an attorney who handles agency sales. The influx of private equity money into the agency market has driven increased attention to details. “Today’s purchase agreement can be long and complicated—90 or more pages of representations, warranties, covenants and indemnification provisions,” says Gary Miller of law firm Boyar Miller. “These agreements can be a minefield for the unwary seller.”
Jon Persky of consulting firm Optimum Performance Solutions has noticed a shift in insurance requirements. While buyers have commonly required sellers to buy tail coverage for their errors and omissions liability insurance policies, “Buyers are now requiring sellers to buy tail coverage on their employment practices liability insurance coverage as well as their cyber liability policy,” he says.
What should be in the contract? “One of the most important provisions for a buyer is to subject each of the principals of the seller to a non-competition covenant,” says Miller. The covenant prohibits the seller’s principals from selling insurance for anyone other than the buyer for a stated time period in a certain geographic territory. Attorney Gary Jacobson of Vander Wel, Jacobson & Yoke, PLLC advises sellers to narrow the agreement to non-piracy of existing customers. “Any kind of vagueness in the non-piracy covenants can be deadly,” he says.
Both parties should also require representations and warranties about items such as the seller’s title to the assets, any liens, outstanding lawsuits, and so on. Miller says these are very important for both seller and buyer to have recourse against the other if either breaches the agreement. He suggests including a maximum the seller will owe if the contract is breached, and a dollar amount of damages the seller may owe to the buyer that are “free” for the seller.
Beamer recommends sellers insist on:
- Specificity on how the purchase price will be allocated for tax purposes, ideally with the allocation heavily weighted toward good will
- Clear statements on any assets excluded from the sale
- Security for the promissory note if the seller will hold it
- Requirements that the buyer will cooperate with the seller should the seller later face an E&O claim
For the benefit of both buyer and seller, the agreement should be very specific about the assets being sold and liabilities being assumed, says Persky. For example, if the seller’s bank accounts are included in the sale, does that include the funds in the accounts? What is the cutoff date after which the buyer receives direct bill commissions?
Jacobson says sellers should avoid any guarantees that one or more jumbo customers will not leave the agency after the closing, unless the parties agree in advance to formula price adjustments. Beamer says that it is better for the seller if the purchase price is expressed as a dollar amount, rather than a formula that fluctuates. The seller should also avoid letting the warranties and representations bind them for longer than a year or two.
Using an off-the-shelf sales contract is not advisable. “I’ve seen some pretty bad circumstances including where an agreement plainly was originally drafted for a buyer, so its slant was all pro-buyer. Then you’ve got someone who’s selling his or her book and they’re using that agreement as is,” Beamer says. “It makes no sense.”
Both sides should retain qualified legal counsel during the process. Selling and buying a business is a major financial transaction that calls for great care and expertise.