The insurance industry LOVES its M&A! Despite a slight decline in activity in Q1 of 2022, mergers and acquisitions remain a popular choice for growth. For sellers, it’s essential to prep the agency prior to listing it in order to receive the best valuation. Often, however, regulatory compliance takes a backseat to financial concerns during this phase as well as during due diligence. This omission can result in last-minute “surprises” that can delay or even derail a deal.
To avoid such issues, here are some compliance questions that every seller needs to ask (and answer) early in the M&A process:
Will the agency continue as an operating concern after the sale/merger?
Begin by determining whether the post-sale entity will use the same FEIN as the current entity. If so, the primary compliance tasks will involve updating ownership information with state regulators. This likely involves a Directors & Officers update to the state insurance department(s) and Secretary of State’s Office(s). If the name and/or primary business address of the agency will change, owners may need to complete name and address changes and possibly amend the entity’s Certificate(s) of Authority.
If the entity will NOT have the same tax ID, the post-sale entity must obtain its own insurance licenses and SOS registrations under that FEIN. Agency licenses are not “transferrable” between FEINs. Licenses will need to be in place before the new agency can solicit new business or service existing policies. The application process needs to begin months before the proposed closing date.
It’s also important to tidy up any outstanding compliance issues before listing the agency. Verify that the agency’s licenses are up to date and surrender any unneeded licenses properly. Do the same for any key individuals who will continue working for the agency post-sale. Verifying that any required business registrations are in place and that the entity’s status is In Good Standing. Any other status may require submitting past-due annual/biennial returns and/or tax filings. (NOTE: This should be done even if the current entity will cease to exist after the sale.)
Lastly, determine if there are any pending regulatory or legal actions that name the agency or its key personnel. Ideally, the current owners will resolve these issues prior to the sale. If that is not possible, any outstanding issues need to be disclosed during the due diligence, so have any relevant documents available for review.
Will current employees (especially producers) transition to the new entity?
Individuals’ licenses follow them from one agency to another, so typically no additional licensing is needed unless the scope of products represented will change significantly. Agents may need to sign new or amended producer agreements, however.
If the post-sale entity has its own licenses, it will need to enter into new carrier contracts/selling agreements with the various insurance companies represented. Even if the terms of this new agreement are identical to those of the old agreement, the agency and its producers will need new appointments. Additionally, the agency needs to terminate producers’ former affiliations and file new ones. This is especially important for the agency’s Designated Responsible Licensed Producer (DRLP) in each state.
Finally, individuals who will NOT stay with the company after the sale also need to determine whether they are eligible for run-off commissions and if they need to remain licensed to receive them. The decision about terminating their licenses will depend on their plans.
Will the new entity want to use the seller’s entity’s name (at least temporarily)?
New agency owners often like to continue using an acquired entity’s name for a while. It can help clients feel more comfortable with the transition. If the new entity will have the same FEIN, continuing to use the previous name isn’t an issue if the sales contract addresses the change.
If an entity with a different FEIN wants to use that name, however, things get more complicated. Whether the new agency wants to use the old name as its true, legal name or register it as a “Doing Business As” name (DBA), the prior holders of the name must relinquish their rights to its use. Remember, though, that not all states allow the voluntary use of DBAs.
Is the new entity prepared to service existing clients’ needs?
Once both parties sign the sale agreement, the new owners will probably want to begin servicing existing accounts immediately. Likewise, a seller likely wants to ensure that valued clients continue to receive quality service. To do so, all required licenses, business registrations, carrier contracts/selling agreements, and appointments must be in place. Applying for a license or registration is NOT sufficient.
Will the business wind down after the sale?
If the post-sale entity has its own FEIN, the owners of the previous entity still have work to do. They should surrender any unneeded agency licenses rather than allow them to lapse at the next renewal cycle. (This is especially true for surplus lines licenses and other special license types that trigger compliance requirements other than renewals.)
The agency will also want to withdraw its foreign business registrations and dissolve its domicile registration. Understanding the costs and timeframe involved to do so is essential to a smooth wind-down. It’s also important to follow the correct order for these processes. Winding down in the entity’s resident and/or domicile state while license cancellations and registration withdrawals are still pending in foreign states can leave the agency in regulatory limbo.
Whether a seller plans to continue in the insurance industry, retire, or undertake a second-act career, it’s best to end their agency on a high note. After all, having spent years establishing a reputation in the industry, why undo all that hard work at the last?