YOU CAN’T SELL WHAT YOU DON’T OWN

Preventing producer-owned books of business

from becoming an unexpected hurdle in the sale of an agency

By Carey Wallace

There is no question that the team is the most valuable asset inside any agency. They hold all the expertise, knowledge, and trust, and they build the relationships that are vital to the ongoing success of the agency. 

It is understandable, then, that many agency owners want to do all they can to create both an environment and incentive packages that are designed to retain the people who make up the team, especially producers. Those incentive packages often include offering producers ownership in their book of business.

While this seems like a very logical and appropriate approach to retaining top talent in the agency, offering producers ownership of their book is one of the most common ways to create confusion and slow the sale of an agency. Without the proper guidance, a producer-owned book of business can become an unexpected hurdle with an impact far greater than expected.

The importance of planning

When  producers are offered full ownership of their book of business, the terms of the agreement are important when the agency owner is thinking about selling. The producers may have the option to be a tag-along in the sale. This option would clearly spell out that if the owner chooses to sell, the producers have the option to sell their book as part of the deal with the exact same terms.

If there is no agreement in place, or if it is silent on this type of scenario, the agency owner cannot sell what is not owned, so the buyer can choose to remove the producer-owned book of business completely from the deal.

By removing the book, the producers could be left with some significant challenges in maintaining the book that they own, due to carrier contracts, finding a new agency home that fits their cultural expectations, and they will likely experience a drop in value of the book they own as the strength of the book may be much greater as a part of the whole than it is on its own.

Often, producers are offered partial ownership in their books of business, and many times these agreements are very vague. Some agreements are handshake agreements that have never been written down. If the agreements are written down, many times the terms do not provide clarity regarding what specifically is owned and what occurs in the event that the producer exits the agency or the agency owner sells.

For instance, if a producer has built a 40% ownership of a book and wants to exit the agency with that 40%, it is unclear which 40% of the accounts are owned by the producer and which of the accounts make up the 60% owned by the agency. For this reason, if the agency owner was contemplating a sale of the agency, this partially owned producer book of business can create complications and slow down the deal.

The buyer typically wants to buy the entire book of business, so there are a few options to accomplish it. The seller can negotiate to buy back the portion of the book that is currently owned by the producer prior to the sale; this approach will slow down the sale process.

The buyer can negotiate with both the owner and the producer, which adds complexity to the deal and may deter the buyer from proceeding with the sale if negotiating with both parties becomes difficult.

The last option is for the buyer to eliminate the book completely and focus only on purchasing the book of business that is 100% owned by the agency owner. This option creates several potential challenges that can impact the seller, producer, and the overall deal.

Potential challenges

Depending on the size of the producer-owned book, removing it from the overall deal can impact the risk of the remaining book of business. It will change the concentration with the carriers and, in some cases, if the book is heavily concentrated with one carrier, selling only the remaining book may impact the buyer’s ability to maintain contingency levels, compensation levels or even the appointment with that carrier.

Removing a large producer-owned book of business may also create a significant impact on the agency’s overall customer concentration. If the producer-owned book was large enough to balance out the overall concentration of one or a small handful of large customer accounts, and that book is eliminated, the overall risk of the remaining book increases. This can cause the deal structure, price, and terms to change drastically.

There are many factors that can impact the retention and overall performance of the book, including total policies per customer, loss ratio, concentration by niche, and loss of specialized expertise—to name just a few. These are all factors that are considered when assessing the risk of a book of business. These and many more factors should be weighed carefully when removing a book of business from a potential deal.

On the other hand, if the producer-owned book of business is not large enough to create a negative impact on the agency’s remaining deal, it is likely that carving this book out of the deal will reduce the value of the producer-owned book.

If the producer does not choose to sell the book with the agency and wants to start his or her own agency once the agency sells, the producer may have difficulty obtaining carrier contracts needed to maintain and continue to grow the book. In addition, network relationships for producers who choose not to sell with an owner and go it alone may be impacted and create challenges to access markets, and achieve the same contingencies and compensation structures that they have grown accustomed to.