Buying, Selling and Merging Agencies

There are three parts of a typical buy-sell process: business valuation, transaction structure and the transaction mechanics — making it work. The following are important aspects to all steps of the process.

Documentation

A buy-sell agreement is frequently the key document in a rep firm’s business continuation plan. Mel Daskal describes the role of the agreement in more detail. “These agreements establish a fair price for an ownership interest in a closely-held business and ensure an orderly business transition. They usually provide that the business (or a portion thereof in the case of multiple owners) will be sold (or offered for sale) at a specified price; and under certain circumstances, which are detailed in the agreement. The primary circumstances (“triggering events”) are: death, disability or retirement (or a sudden uncontrollable desire to prepare tax returns for a living).

“As most readers know, these agreements are designed to protect business owners and investors by providing agreed‑upon arrangements not only in the event of death, disability or retirement, but also disagreement, firing, resignation, bankruptcy, dishonesty, divorce, insolvency — or simply the desire to terminate one’s interest in the business for any reason. Perhaps the biggest mistake you can make is to not have such an agreement the moment there is more than one owner! The second biggest mistake is to not cover all of the just‑mentioned contingencies.” (October 2007, Agency Sales)

Legal Aspects

There are a number of legal agreements to consider when beginning the buy-sell process. In a recent two-part Agency Sales article, Gerald Newman provides a summary roadmap of the issues, steps, and mechanics involved in the purchase or sale of a sales representative agency. According to Newman, legal aspects to consider include a letter of intent, confidentiality agreements, third-party consents, and a well-thought due diligence plan.

“Most transactions begin with a so-called ‘letter of intent.’ The purpose of the letter of intent is to set out the basic business terms of the deal, such as whether it will be a sale of stock or assets, the purchase price, and how and when the purchase price will be paid. Letters of intent are typically “non-binding.” In other words, they typically are not enforceable in court. Most buyers, even after they sign a letter of intent, are not willing to sign a binding agreement until they have been able to learn more about the target company through the “due diligence” process. While a letter of intent may not have any legal effect, it does have a psychological value. Buyers and sellers should not expect to easily renegotiate the purchase price (or any other significant term) once set forth in a letter of intent.”

When it comes to confidentiality, Newman adds these thoughts. “In most cases, buyers and sellers want to keep a potential transaction confidential. Buyers don’t want to invite other bidders, and sellers don’t want employees, customers, principals, or competitors to know the business is for sale (particularly since the transaction could fall through). Further, as part of the due diligence process, a seller will often have to disclose trade secrets or other sensitive information to the buyer. From the seller’s point of view, it is imperative that confidential information be protected from disclosure or improper use by the buyer — particularly if the buyer is a competitor. The need for confidentiality is often covered in a letter of intent. If handled this way, the letter of intent must make clear that the parties intend to be legally bound by its confidentiality provisions. However, where confidentiality is a major issue, it is best handled in a separate written agreement, typically referred to as a ‘Confidentiality Agreement.’”

Reiterating the importance of doing your homework, Newman suggests a thorough investigative process. “Due diligence is the investigative process associated with purchasing a business. Some buyers even ‘camp out’ at the seller to complete the investigation. For the buyer, due diligence is often crucial, as it is the only way to ‘look under the hood’ of the business and make sure it really works, is worth the price agreed upon by the parties, and that the business the buyer actually ends up owning is the business the buyer thought he was purchasing.

“In fact, buyers who fail to adequately conduct due diligence may be barred by a court from claiming after the sale that something about the sale was improper.

“On the other hand, due diligence can be quite burdensome for the seller. Sellers will often spend weeks digging materials out of files for the buyer to review, and making its offices, staff and records available to the buyer. At the end of the process, each party should know everything about the business. For the well-organized seller, the process is not too painful. For less sophisticated sellers, the due diligence process often involves getting the company into the shape it should have been in the first place.”

Available Resources

The bottom line is preparation. Utilize the available resources, retain appropriate counsel, and do your homework. If you follow these steps, you are that much closer to a successful transaction.

In addition to mapping out and fine-tuning a thorough plan, there are a number of resources available to assist you in many steps of the way. First and foremost, MANA Members have access to MANA’s executive team, including Bryan Shirley, who prior to becoming MANA’s president and CEO, spent considerable time consulting businesses on rep firm mergers and acquisitions. In addition, there’s a list of qualified MANA attorneys who are well-versed in the culture of the rep business and specifically in rep firm buy-sell transactions. MANA members can access a multitude of online resources including special reports and article reprints. Non-members can also purchase these reports at MANAonline.org. Remember, due-diligence is a key part of any sale, purchase or merger plan.

The following is a summary of available online resources that can be found in the member area of the MANA website.

MANA Special Reports:

• Valuing the Rep Firm — How do I place a value on my firm? MANA addresses the issue from a variety of viewpoints in this nine-chapter report with inputs from accountants, attorneys, financial consultants, and industry experts. Includes case studies of actual rep firm sales. This report is an excellent companion to either of the following reports.
• The Valuation and Sale of an Entire Manufacturers’ Sales Agency — This timely report contains the latest information available from the rep profession’s leading experts on the valuation and sale of an agency. It addresses valuing the rep firm from the standpoint of both buyers and sellers, selling to the family, divorce, and the Internal Revenue Service. It also addresses advance planning, mergers, acquisitions, joint ventures, competing lines, payment options, and more. This report is an excellent companion to MANA’s Valuing the Rep Firm.
• Selling Part of Your Rep Firm To Your Employees or Partners — This report addresses the issues unique to selling your rep firm to your employees or partners. It is a companion report to The Valuation and Sale of an Entire Manufacturers’ Sales Agency and Valuing the Rep Firm.

Agency Sales articles by Mel Daskal:

• “Selling or Buying a Business”
• “Buy-Sell Agreements”
• “C Corporations”
• “S Corporations”
• “Limited Liability Companies”

Agency Sales articles by attorney Gerald M. Newman:

• “A Roadmap to Success Legal Aspects of Buying or Selling a Rep Firm” — Parts I and II (May and June 2008)