We represent buyers and sellers of insurance agencies across New York. This page describes how the closing works and where the pitfalls are, so that the closing and the handover of the business go smoothly.
What is being sold in an insurance agency sale is the book of existing insurance contracts and the agency’s reputation in the community. The contracts are the most valuable asset, because the agency earns a commission every time a customer’s policy renews, even when it renews automatically. The goodwill and reputation matter because they bring in more self-renewing contracts in the future.
The Closing
The closing of an insurance agency sale can be done remotely. The parties and their attorneys negotiate by phone, and the attorneys edit the documents as the negotiation advances, exchanging redlined Word versions by email. Once the terms are agreed, the buyer and seller sign, exchange scanned copies by email, and send hard copies by overnight FedEx or UPS.
The Escrow
To make sure the buyer receives the customer accounts and the seller receives the money, one of the attorneys holds the funds in escrow while the insurance vendor accounts are transferred. The escrow attorney releases the funds to the seller once the transfer is complete and both the buyer and the seller instruct the attorney to release them.
Seller Financing
Many insurance agency sales include a seller-financed component, with the seller taking a promissory note as part of the price. For example, on an $80,000 promissory note the buyer might agree to pay the seller $1,500 per month for five years. Some promissory notes are made contingent on the non-compete agreement.
The Non-Compete Agreement
Because what is being sold is goodwill, the buyer does not want the seller to take that goodwill back. Buyers therefore insist that the seller sign a confidentiality agreement and a covenant not to compete. A typical example is an agreement not to sell insurance within a twenty-mile radius of the agency being sold for the next five years. The exact terms are negotiable between the buyer and the seller.
What the Buyer Receives at Closing
At the closing the buyer receives the assets being bought: a complete list of customers, including current, active, canceled and inactive customers; all existing insurance contract information, including the carriers and the names and contact details of their marketing representatives; the producer codes, agency codes, user names and passwords; all electronic information on the current customers, including company name, policy number and client contact information; and a complete backup of all client data from the seller’s data management system.
Documents Signed at Closing
Both parties sign a set of documents at the closing. Together they transfer the business and protect each side legally. These are the documents in a typical sale of an insurance agency.
| Document | What it does |
|---|---|
| Contract | Sets the price, the assets being bought, the due diligence period and the closing date. |
| Amendment to Contract | As the parties understand the deal better, more issues come up and the contract is amended. |
| Bill of Sale | The main document that transfers the business; it works like a deed to a house. The insurance vendors need it to transfer the accounts to the new operator. |
| Confidentiality Agreement and Covenant Not to Compete | The buyer is buying the right to commissions from clients loyal to the agency, so the buyer needs assurance the seller cannot simply take those clients back. |
| Assignments | Assignment of trade names, telephone numbers, website and email addresses, and contracts and information. |
| Indemnity Agreement | The buyer is taking a risk on assets it does not know everything about. The indemnity gives the buyer the right to sue the seller for reimbursement of any debts that arose before the sale. |
| Minutes and Resolutions | Corporate documents giving each company legal authority to sell and buy the assets: minutes and a resolution of the buyer’s company, and minutes and a resolution of the seller’s company. |
| Limited Powers of Attorney | Make it easier for the buyer to take over operations: a limited power of attorney for payment and one for the assignment of policies and contracts. |
| Letter from the seller’s company | Confirms to vendors, customers and others that the business has a new owner. |
| Closing Statement | Sets out how much is being paid and how much of it goes to the seller, the broker, the closing attorney and the other parties involved. |
| Allocation Agreement | A statement of whether the deal is an asset sale or a stock sale, which may be needed for tax purposes. |
| Promissory Note | If part of the deal is seller-financed, sets out the total amount financed, the number of payments and the monthly payment. |
| Security Agreement | Secures the promissory note against the assets of the agency. |
| Personal Guaranty | Makes the buyer personally responsible for the promissory note even though the note is payable by the buyer’s corporation. |
| UCC-1 Financing Statement | Filed with New York State so that anyone else lending to the buyer knows of the seller’s interest under the promissory note. |
| Memorandum Regarding Fees | Included if one of the attorneys acts as closing agent. |
| Certification | The seller certifies that nothing has changed since the contract was signed. |
| Assignment and Assumption of Lease | If the lease is one of the assets sold, it is assigned from seller to buyer with the landlord’s consent. |
| Letter of Authorization | Authorizes the import of customer data into the buyer’s database. |
| Subordination Agreement | If the buyer is financing the deal through a bank, the bank will usually require the seller-financed loan to be subordinated to its own. |
Once the closing is done, the seller typically stays on for a few days to show the new operator the ropes and make sure the customers are being served correctly. The new owner then takes over the agency.
If you are looking to buy or sell an insurance agency in New York, call the Law Offices of Albert Goodwin at 212-233-1233 or email [email protected].
