One of the most difficult challenges facing an agency owner when selling his business is having, for the first time in a long time, a boss. Most agency owners aren’t micromanaged. 

But there is a certain uneasiness and distrust coming from the basic premise that you no longer just look in the mirror for accountability. Someone else, someone you barely know, has ultimate responsibility for the results you deliver. 

Many agency owners want some form of protection from the buyer (ironically their new partner), concerned they will be treated unfairly. This can come in many different forms, the most common of which is an employment agreement. Some buyers offer a contract for employment to major shareholders or other employees as they see fit. The term of the contract usually lasts the length of the seller’s earnout. The uniqueness of the agreement is that, in most cases, the contract isn’t tied to the purchase agreement because it can mess up the tax treatment of a seller’s earnout if the ability to receive the earnout is contingent on their employment (consult your attorney on this).

The employment agreements are meant as an accommodation to the seller to make them more comfortable with the transition. When these agreements lapse, the employment terms typically transition to an at-will employment arrangement just like the rest of the previous owner’s staff.

Since every buyer is different, it’s important to be aware of some nuances:

  1. The agreement is to protect the seller from being fired for no reason. If the buyer fires the employee without cause, the employee is typically due compensation for the duration of the agreement.
  2. Virtually all employment agreements say an employee can be terminated for cause. That effectively voids the contract and leaves the buyer with no trailing liability. Cause is typically one of the most negotiated terms in a transaction.
  3. Disability is also a concern too. Most agreements revert to long-term disability coverage in the case of a tragedy related to the covered employee. Most sellers want to get paid the full value of their contract if they become disabled.
  4.  Roughly half of buyers offer employment agreements. The rationale why they don’t offer agreements varies. Many sellers assume they will receive one and are often distraught when their preferred partner adamantly opposes it.
  5. Many sellers want employment agreements for minority shareholders or key employees.  Most buyers are not unwilling to do this. It’s nice to want to take care of your team, but there are other ways to ensure their protection. Contract language on job duties can give sellers authority over hiring and firing decisions within their span of control. This typically satisfies the seller’s request.

The agency book of business and the staff’s influence over it is the greatest job protection sellers have. Employment agreements are emotional security blankets. Reality is, if a buyer were to eliminate a key leader or producer, there is always significant risk his book of business would wither away. Don’t get me wrong; if I were in the fortunate position to sell an agency, I would definitely want an employment agreement. However, for those who sell to firms who do not offer them, don’t underestimate the security your individual book of business affords. While you will be estopped from taking the business because of restrictive covenants, a buyer would be taking a huge risk to their investment to terminate you for no real reason.

So whether you get an employment agreement or not, just keep working hard, take care of your clients and staff, and in most cases your importance to your operation will be all the security you need.

Market Update

January started off strong with 32 deals. While a good month, it lags behind the past two Januarys (59 in 2015, 41 in 2014). It is likely some announcements were delayed and January’s total will increase. 

Hub International, AssuredPartners, and Confie Seguros led the charge with three deals each.  USI Holdings announced two transactions, and 21 other firms announced one each.

Seven deals were employee benefits, which equates to roughly 22% of the volume. Seven transactions were categorized as non-retail. This includes wholesale and specialty brokerages and program administrators.

Interestingly, six of the transactions were from Texas—a quarter of the 2015 Texas deal count.