The ability for a rep agency owner to transfer the value of his agency may ultimately depend upon his or her viability as a candidate for a merger or acquisition. Mergers and acquisitions of rep agencies have become quite common and have grown out of a number of factors from the buyer, seller and merger standpoints.
The seller can only sell his agency to either key people or a compatible rep agency in the marketplace. He may not have successors in the agency or the offer from the buyer may be too lucrative. The seller may have also lost some lines and may recognize the fact that other lines may also be lost if his agency is not perceived as strong by his factories.
A buyer may be interested in purchasing your agency because he/she may see a need in rounding out his line card. He also may recognize that his agency has more value with more lines, more territory and more salespeople.
A merger may become attractive for owners who do not have major line conflicts and see the benefits of economies of scale. The factories also are demanding additional coverage and responsibilities — without increasing commission!
A rep agency merger or acquisition may be the quickest manner in which to increase value in your agency, not only by increasing commission, but because the larger and more successful you are, the more likely major lines will be attracted to you.
The following are steps and issues to help you work through this process of a merger or acquisition:
- Finding the Buyer, Seller or Potential Company to Merge — There are many smaller rep agencies whose owners need to sell to an outside agency in order to capitalize on the value of the agency.
- Conflicting Lines — Once there is a potential seller, buyer or merger, the next step is to see what potential line risks may be involved.
- Confidentiality Agreement — Assuming the owners have compatible personalities, the next step is to have a confidentiality agreement signed so that any information will not be disclosed either prior to the transaction or if the transaction is not completed.
- Valuation/Accounting — The valuation of the transaction must be established either using typical rep agency guidelines (i.e., one times annual gross commission) or by a formal or informal valuation given by a third-party expert.
- Key Employee Conflicts — Before you enter into the agreement you must be sure that the key people of each other’s agency will be accepted or they may not stay with the new agency. This would be a major problem, because a large part of the value in the transaction is dependent on key people.
- Tax Structure of a Sold, Bought or Merged Company — There are benefits to having the new company as an S corp or as an LLC owning both companies. These issues should be addressed with your tax attorney.
- Tax Structure of Purchase or Payments — The way the payout is designed on a cash-flow basis may make or break the transaction. Stock and Asset Sales are non-deductible to the purchaser, while deferred compensation/consulting payments are deductible to the purchaser. You need to evaluate what the best structure of the payout may be.
- Cash-Flow Model — After you have worked on optimizing the corporate structure and payout structure you must now run a cash-flow model that will indicate what cash-flow requirements will be needed and consequently how successful this transaction may be.
- Buy Sell Agreement and Legal Documents — The buy sell agreement and corresponding legal contract will set out the purchase price, payout terms, covenants not to compete, etc.
- Funding at Death and Disability — The last step is to ensure that there is proper funding for the buyout at the death or disability of a seller, buyer or owner. This is taken care of through various life and disability funding strategies.
This article is not meant as tax or legal counsel, and you should consult with your tax advisor prior to implementation.