This checklist is a guide to help you think about what information you may need in a purchase agreement with important items to consider as you go through the acquisition process. Consider the assistance of a lawyer or attorney to help you draft an agreement and assist in navigating through the entire process.
Authorization to Transact
Both the buyer and seller need to be the authorized parties with the legal ability to enter into the transaction. This includes the legal names of the seller and purchaser, signatures of all parties, and may include a seller's spouse's written consent.
Timing & Transaction Price
Document the purchase price and perhaps how it was calculated. Ensuring both buyer and seller understand how the price was derived can be just as valuable as knowing the price itself. Buyer and seller should discuss what the adjustments to the purchase price, if any, should be based on. As for the timeline, how long does each party want all of this to take? Are you flexible with timing, or is it of the essence? Is there a desire to enter into an exclusivity agreement? Is a deposit necessary?
Depending on the situation, holding a portion of the purchase price in an escrow account may be necessary to secure indemnification obligations or price adjustments. Consider any scenarios where termination of the agreement may be necessary, and consider all residual effects that could occur as a result of termination.
Conveyance of Title without Liens
The buyer should review the list of assets that would be included in the purchase and ensure that those assets would be sold free of any liens or liabilities. A lien search can often be performed online and help to identify potential problems with the title of any assets. If there are such liabilities, determine if they comprise the majority of the business, and which of these liabilities will be assumed or paid off upon closing of the purchase.
It's typical in agency acquisition transactions that the seller agrees not to compete with the buyer within a given geographic area, nor become the agent or employee of one of the buyer's competitors.
Non-Solicitation of Customers or Employees
It's also typical that the seller agrees not to solicit employees, clients or any referral sources of the business that is currently in the process of being purchased.
Financing Related Issues
A lender will need to review the draft and a final signed copy of the purchase agreement, any seller notes or other purchase related legal documents. If the seller is financing a portion of the purchase price via a seller note, the lender may want each seller to agree to subordination and execute a subordination agreement related to the assets being purchased.
Representations & Warranties, Covenants, Indemnification
During your due diligence ensure that a thorough review of the assets is completed. Address any issues that may have been uncovered during the due diligence review with the other party. Include appropriate representations and warranties related to accuracy of the financial information provided. Also, consider if there are any liabilities that may require specific indemnification and if there are any covenants concerning the assets being transferred.
Specify what will happen in the event that one or more carriers will not transfer the book, or there is a misrepresentation of the book or financial information provided in due diligence. You want to ensure you get what you paid for, and if not, there is a mechanism to get a portion of the purchase price back under certain conditions.
Transfer of Book (Important in a Multi-Carrier Situation)
It's important to determine when the book transfers will occur. Some carriers will transfer at the time of purchase or transfer at the time of renewal.
Commission and Bonus Payments
Specify when commission and bonus payments transfer. It could be based upon a commission statement date irrespective of when the cash will be received or a specific date like the closing date.
Cooperation among Parties
Include assurances that the seller will have a responsibility to forward any communication received post closing to the buyer for a period of time. This may include commission statements, commission checks or electronic payments, customer communications etc.
This list isn't intended to be all inclusive but to provide some guidance for items to include in your insurance agency asset purchase agreement. Again, it's recommended that you consider the assistance of a lawyer or attorney to help you draft an agreement and assist in navigating through the entire process.