You work too hard to leave your agency’s future in question. One way to document your long-term agency plans – and give you and your business partners peace of mind – is to create a solid buy-sell agreement. A buy-sell agreement, if done correctly, is legally binding and ensures a smooth ownership transition.
“Every agency should have a formal buy-sell agreement on file as part of its perpetuation plan,” said Rick Wittmann, assistant vice president of marketing operations for General Casualty Insurance Companies. Wittmann has created perpetuation planning tools, including a buy-sell agreement worksheet, to help General Casualty agents plan for the future.
He shares these six steps to a solid buy-sell agreement:
1. List triggering events. Ownership transfers could be due to retirement, death, bankruptcy, an offer to purchase, or several other circumstances.
2. Establish sale requirements. Outline steps for shareholders to follow to complete a sale. Include restrictions, such as shareholders’ limits for selling personal stock or pledging stock as collateral.
3. Determine valuation method and timing. Will the agency’s price be determined by a third-party appraisal, valuation formula or a set value that’s negotiated periodically? When, relative to the triggering event, will the agency’s value be set?
4. Address funding. Terms for payment include cash that’s paid immediately, payments over a set time period, or both.
5. Include restrictive covenants. Most agreements prevent departing shareholders from competing with the agency for a set time following the ownership transfer.
6. Consult an attorney. Make sure your buy-sell agreement is legally binding. Also name an attorney to execute the ownership transfer.
Just like any component of your agency perpetuation plan, Wittmann adds that your buy-sell agreement should be reviewed and updated regularly.
One agency’s experience
The history of agency Liscomb Hood Mason (Duluth, Minn.) proves how valuable a solid agency perpetuation plan can be: It’s successfully changed ownership five times since it was established in
1927. Today the agency’s management continues to update and review its plan often, including its buy-sell agreement.
“We believe that our plans to perpetuate internally will provide continuity and stability for our employees, the companies we represent and our dedicated customers,” said owner Larry Sumbs. “We look at this as a long-term process that will foster our independence and provide opportunities for our younger generation of employees.”
For more information contact Anne M. Smith.