What to Know When Selling Your Insurance Agency

Want to cash in? Suffering from burnout? Looking for a strategic partner? Itching to pursue other interests? Or is it simply time to have a family member or friend take over and grow the business?

There are many reasons to sell your insurance agency, that’s clear. Less obvious is exactly how owners should go about preparing their companies for sale and the items to focus on to ensure a seamless and profitable transaction.

Below are a few questions and answers owners might consider selling their agencies.

Is there anything I should do preliminarily to get my agency ready for sale?

Yes, to best position your business for sale, some corporate, financial and legal housekeeping is in order. Without question, any serious buyer will be conducting thorough due diligence before agreeing to an acquisition. In preparation, you should attend to several items so that a sales transaction can proceed with minimal issues.

To begin, you should review your corporate documentation, including bylaws, minutes, shareholder agreements and the like, making sure that all corporate formalities have been properly managed and any deficiencies are addressed and corrected. Next, it’s imperative that you marshal meaningful financial documentation — commissions statements, tax returns, and your balance sheet and profit/loss statements, to name a few — all of which will be requested by a buyer and necessary to substantiate your profitability and ultimate sales price.

Of course, the universe of buyers will want to know what’s in store in terms of legal obligations in the event an acquisition materializes, so legal documentation should be flagged and made available for review. This includes the corporate records previously mentioned, all agreements binding your agency (for instance, sales and service contracts, carrier agreements, rights of first refusal, NDAs, purchase agreements, restrictive covenants, employment and independent contractor agreements, leases, credit agreements, and contracts with vendors), documents related to pending or potential litigation, regulatory complaints, liens, loan documentation, licenses, and files pertaining to your intellectual property.

Beyond these corporate, financial and legal records, are there any other documents I should be thinking about?

Absolutely. Let’s not forget, you’re selling an insurance agency, which means you need to confirm that your carrier agreements and appointments are up-to-date, and commissions (and commission statements) are accurate. Additionally, you should identify any required consents that’ll need to be obtained prior to closing. Likewise, you’ll want to review any aggregator and network relationships — those providing market access — and modify your agreements with them to the extent applicable restrictive provisions affect your ability to sell.

What about my employees — do they create any issues for considerations?

They certainly do. To the extent an acquisition is on the horizon, employee retention may be of critical importance to your buyer. Consequently, this is another area requiring your attention, as is an accounting of who within the agency may have a vested interest in the books of business that form the basis of your asking price. To the extent an employee or independent contractor owns a book, in whole or in part, that interest will need to be negotiated during the sale. In addition, the due diligence process will require you to present your employee handbook, written workplace policies, and all other employee-centric documentation.

Selling my agency is a huge deal. I imagine that I should be consulting with professional advisors, but who exactly should I be seeking advice from?

You’re right, selling your business is very consequential. For this reason, you want to make sure you’ve dotted all “I”s, crossed every “T” and are commanding a fair price for your agency. To get there, you should be sure to seek counsel from a CPA to cover the accounting and tax consequences of a sale. Along with your attorney, a CPA can help you settle the deal structure. This will be dependent on a variety of factors (for example, are you a C-Corp., S-Corp or LLC and is this a stock or asset sale?). Also, a CPA will help you to better understand your financial statements and a purchase price, likely based upon a multiple of gross revenues and/or EBITDA (earnings before interest, taxes, depreciation and amortization).

An investment banker can get a handle on the current market, flush out and gauge interest from numerous potential buyers, and assist with the valuation of your business. Once a buyer is secured, the investment banker, together with your lawyer, can also assist in negotiating the terms of a letter of intent. Be aware that these services don’t come cheap (typically, investment banking fees are up to 5% of the purchase price).

As for legal counsel, you’ll need guidance from an attorney with experience managing mergers and acquisitions who can negotiate the terms of the transaction, navigate the complexities of the deal, and draft and review all the documentation, including the purchase agreement and related schedules.

Of note, you’ll also want to look internally to determine who within your agency is “in the know” and can be trusted to manage the M&A on a day-to-day basis.

It sounds like I’ll be on the receiving end of some rather meaningful documents if I decide to sell. What are the most significant ones that I would expect to see?

Two of the weightier agreements that would come your way if a sale was in the works are a letter of intent (which is typically generated by the buyer and, for the most part, is non-binding) and an asset purchase agreement.

The letter of intent covers a laundry list of a deal’s terms, including:

• Identification of the parties (of course, you’ll want to connect with referrals, carriers and trusted advisors to ensure that the buyer is a good fit);
• An outline of the deal structure;
• The purchase price and payment details (a lump sum, payment over time (cash plus a promissory note), or an earnout (cash plus a percentage of net profits), in which case the earnout payment structure will also be specified;
• A period for due diligence;
• The applicable exclusivity period (typically, when a buyer is spending time and energy conducting due diligence, a seller can’t continue to shop around for another buyer for 60 to 90 days);
• Confidentiality provisions.

The letter of intent will make reference to definitive agreements, the most important of which is the asset purchase agreement. This is the document that governs the sale of your agency and specifies every term of sale. The asset purchase agreement sets forth the parties; the purchase price and related provisions; an inventory of seller liabilities, if any, that aren’t transferable to the buyer as part of the transaction (e.g., certain excluded contracts, taxes, etc.); a list of representations and warranties (essentially, statements and promises of fact related to title, financial statements, employees, carriers, customers, and litigation, among other things); indemnifications; restrictive covenants (clauses that prevent, prohibit, restrict or limit your actions); and reference to ancillary documents like employee agreements, leases and lease assignments, and carrier notices and consents.

Again, given the consequence and complexity of the asset purchase agreement, this is a document that should be negotiated and drafted by experienced legal counsel.

Anything else I should keep in mind as I contemplate the sale of my agency?

To be clear, this Q&A isn’t an exhaustive review of the items to be thinking about as you consider the sale of your business, though it does touch upon the big picture issues that should be front of mind. As you get closer to pulling the trigger on a sale, it’s important that you huddle with your trusted advisors — CPA, investment banker and attorney — so that your purchase price is maximized and financial and legal interests are adequately protected.