confidential sale
7 min to read

Steps to Improve Confidentiality During the Sale of Your Agency

When it comes time to selling your agency, confidentiality is vitally important.  You may be dealing with one or more buyers, each of whom will have a multitude of questions and requests and his/her own opinion of how to go about the process of acquiring your agency.  The potential of a breach of confidentiality drastically increases with time, and once the word gets out, there is no turning back.  So how can you, the agency owner, maintain the highest level of confidentiality during a sale? This article will navigate you through some steps to help minimize the risk of a confidentiality breach during a sale of your agency.

Qualifying Buyers

The first step before you release any details to the buyer is to determine if they are qualified.  Can they get the funds to close a deal your size?  If the deal will be financed, expect them to need 20% of the price in cash and be wary if they claim to be pre-qualified with a lender because loan approvals depend on the deal as much as the buyer.  Have they acquired an agency before?  Experience makes a world of difference in getting a deal done.   Can they get the carrier appointments to take over your agency?  Certain companies do not accept new appointments or agents with no ownership experience.  Aside from buying an income stream, does the acquisition make sense?  If the buyer has no strategic advantage for buying the agency, then they are not the best buyer and may not ultimately be successful with the business.  You have to gauge their capability, motivation and risk-aversion before moving forward.  Otherwise, you’ll be wasting a lot of time and opening yourself up to an unnecessary risk of a confidentiality breach.  With a marketplace flush with wannabe buyers, there is an endless stream of tire kickers willing to waste your time too.

Non-Disclosure Agreements

A Non-Disclosure Agreement (NDA) is likely a document that you are familiar with.  Nevertheless, they can come in many forms depending on the purpose of the NDA and who drafts it.  A transaction NDA is needed to protect your confidential information, and the nature of the discussions between you and a buyer, from being disclosed to a third party.  The transaction should start with the execution of an NDA.  The NDA can be one-way, protecting you, or mutual, protecting you and the buyer.  The NDA should include: (1) a definition of confidential information, (2) term of confidentiality (i.e. length of restriction), (3) a disclosure/representation clause that the signer is responsible for any breaches by his/her representatives, employees, etc., (4) a specified intended use of the confidential information, (5) a ‘legal obligation to disclose’ clause in the event one party is required to disclose information at a later date, such as by a court, (6) the process for returning/destroying confidential information, (7) remedies against a breaching party (e.g. monetary damage or injunctive relief), (8) restrictions on future interactions with the seller’s employees (e.g. non-solicit/non-hire language) and (9) a ‘no binding agreement’ clause that stipulates the parties may terminate discussions.  You should seek counsel from your attorney before the execution of an NDA to make sure all the proper protections are included.

Disclosing Agency Information

After you have gauged the buyer’s qualifications and executed a proper NDA, now it’s time to share information.  Knowing what to disclose and when to disclose it can be a game of cat and mouse.   Typically, buyers want lots of information on an agency before presenting an offer, especially if they think they are they only suitor.  As the seller, you likely want to put as little work in as possible before seeing an offer.  It’s a show-me-yours-I’ll-show-you-mine conundrum.

It is in your best interest to provide current, accurate and detailed data about the agency to allow the buyer to make an offer.  Omitting material information, or providing data that is not current, could very well cause a renegotiation at a later point.  Conversely, many buyers will proceed with a full due diligence list before making an offer if permitted.  It is a balancing act and one that might be challenging if you are unfamiliar with a buyer’s tactics or have not sold an agency before.  Again, when it comes to confidentiality, time delays are the enemy, so you need to respond diligently and force the buyer’s hand on making an offer.

Disclosing Other Parties

It should go without saying that the more people that know that you are selling the agency, the higher the likelihood for a breach of confidentiality before the transaction is consummated.  When managing a transaction, we push to complete due diligence before any additional parties are disclosed, such as insurance company representatives or employees, and disclosure of additional parties is kept at an absolute minimum.  Some agency owners feel obligated to tell employees that they are pursuing a sale.  While the motivation is from good intentions, most employees have heard war stories of agency M&A transactions gone bad.  The prospect of losing your job when you live paycheck-to-paycheck can be unnerving.  As such, it is best for everyone if the employees are disclosed only once you are 100% certain the deal is going through, and you are ready to introduce them to the buyer.  In most cases, the buyer is a larger organization that will offer your staff additional resources and benefits, which the buyer can articulate once you introduce them and help alleviate the employees’ concerns.

As an agency owner, you have spent considerable time, energy and money in building your business.  You deserve a smooth, rewarding and successful exit, but not handling confidentiality appropriately can derail your objective and leave you with a mess to clean up after a deal fails.  We know because we have been hired after many failed transactions where the client had attempted to sell on their own.  If you are not confident in your ability to execute a successful transaction, seek professional guidance.  Our firm has successfully completed over 150 agency sale transactions and we would be happy to assist to you.

Written by Sean Brelsford, CBI

Experts in insurance distribution business valuation, sale, and acquisition

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