Once you have reached a mutual understanding with the seller, it’s a good idea to document your discussions to avoid misunderstandings. This can be a simple letter or even an email. This communication is also helpful to the attorney who is preparing the purchase agreement as well as your lender if you’re seeking financing. Keep it simple, but include the main elements of the transaction on which you agree. A straightforward letter or a bullet point email can alleviate ambiguities that arise in the middle of closing the transaction.
Key points to include in a Letter of Intent
Purchase amount: This should be the total purchase price. It is best to state the actual dollars, not a calculation such as two times revenue. You’ve discussed it, now put the total price in writing.
Brief description of the agency and/or any carve outs: What are you agreeing to buy? Sample phrases would be “including all new and renewal business produced by the agency.” A carve out example would occur if a specific book or line of business is not included in the deal. This is particularly helpful if the seller will stay on as a producer post-closing, as both parties need clarity on ownership of the book.
Transaction structure: Are you purchasing the stock (the actual legal entity) or assets (book of business) of the agency? Tax implications vary widely in a Stock Deal versus Asset Deal so make sure you and the seller understand both. If you are entering an Asset Deal and you are not familiar with the 338 election, consult your CPA.
Working Capital: Generally, if you are doing an Asset Deal, the buyer is expected to provide working capital (cash) to meet expenses until those first commission payments roll in post-closing. Be clear about who receives the commission checks that first month after close (usually the buyer). In a Stock Deal, be sure to identify how much cash will be left in the company at closing. Usually a seller will clean out excess cash before closing in a Stock Deal; it’s customary for the buyer to request that 30 to 60 days of working capital remain in the company. This would be to cover payroll, rent, and expenses before the commission checks arrive. This is all negotiable, just be certain it’s addressed so there are no surprises at the closing table.
Terms of payment: Outline how much cash you will bring at close, as well as the earn out and conditions, seller finance and terms, and other relevant terms. If there are any post-closing or contingent adjustments to the purchase price, they need to be clearly defined.
Specific unique elements: This is the space to outline any issues that are agreed upon but not covered elsewhere. This can include things such as seller transition period and related duties, continuing lease of office space, and retaining certain employees for a specific time period.
Qualifiers: This paragraph should include any contingencies or items that will be finalized prior to close. Common qualifiers are things like: Acquisition is subject to carrier approval; The purchase is subject to financing; Purchase price must be verified as two times commission for the trailing twelve months.
Due Diligence and No-Shop Provision: State the timeline for seller to provide documents and buyer to complete review, such as “Buyer agrees to complete due diligence by xxxx,” and/or, “Seller agrees to cooperate fully providing information requested.” It’s also a good idea to agree that the seller will not “shop the deal.” Adding a clause like, “Seller agrees to work solely with buyer and entertain no other offers until xxxx date” is good practice to cover this risk.
Timeline: Determine specific target dates of closing the transaction. This can help move the process along in a timely manner. You can also decide that the transaction timeline may be extended if mutually agreed on.
With these insurance agent tips in mind, best of luck with your negotiations and an agreed upon Letter of Intent.
Kelly Drouillard is the general manager of insurance lending at Live Oak Bank, Wilmington, NC. Reach her at firstname.lastname@example.org or 913-980-7773.