In this video, you get answers to these questions:
- How to buy or sell a Manufacturers Rep Agency?
- What should you know as a buyer and a seller?
- What issues are unique when buying a Manufacturers Rep Agency?
- How do you structure a transition?
- How do appraise the Business?
When it comes to selling your business or sales agency — what can you reasonably expect to achieve? How is it achieved? What are prospective buyers looking for as new owners and business partners? What is a fair middle-ground that can be achieved by both parties concerning an agency ownership transfer?
Our experienced business attorneys, who have overseen agency ownership transfers and have presented to sales rep trade associations, demystify the process in this step-by-step checklist.
Legal Checklist: Buying and Selling a Rep Firm
Letter of Intent (LOI)
This typically non-binding document lists the basic terms of the deal, including whether it will be a sale of stock or assets, the purchase price, and how and when the purchase price will be paid. While LOIs are usually nonbinding, sometimes certain provisions of the letter will be explicitly binding – such as the seller’s agreement not to solicit other buyers or a confidentiality agreement.
Buyers should ensure the business is functioning properly and is worth the agreed upon price. Sellers should expect to make all their files, records, offices, and staff available for the buyer’s review. If the buyer is giving the seller a promissory note as part of the purchase price, the seller should verify the buyer’s creditworthiness, seek personal guarantees, and have a right to take back the business if the buyer fails to pay. If part of the buyer’s payment to the seller includes shares in the buyer’s company, the seller should do its own due diligence on the buyer.
Generally, the sale of a business is structed either as an asset or stock sale. An asset sale is the purchase of individual assets and liabilities, whereas a stock sale is the purchase of the owner’s shares of the corporation. Tax implications and potential liabilities are primary concerns when negotiating the type of transaction. From the buyer’s perspective, an asset sale is ideal, while sellers typically prefer stock sales.
Valuing the Business
The “rule of thumb” with rep firm valuations is that they are worth around 100% of the previous year’s gross commission income. This valuation can be higher if there are stable relationships with principals and customers, the products market growth potential, and there has been steady growth in the firm’s commission income. Sellers can maximize purchase price by sharing risk with the buyer. For example, the price could be 15% of gross commission income for eight years after the sale.
Many important provisions should be in writing, including the seller’s representations and warranties about the business, payment terms, transfer of title, consents of third-parties, and the rights of either party if the other breaches the agreement. In addition, the seller should expect for the buyer to ask for a covenant not to compete, which is generally enforceable. In addition, a consulting agreement is useful to ensure the seller remains available to the business for a period of time after the sale. This is especially crucial with rep firms that rely heavily on relationships with principals and customers. A sizeable part of the overall price paid for the business may be allocated to the consulting agreements.
A business sale can be structured many ways, from a tax perspective, having a significant financial impact on the buyer and seller. In general, sellers and buyers have adverse tax interests: they both want preferential tax treatment. Ignoring the tax characterization of a business sale can result in significant tax costs to an inattentive seller or buyer.
Third Party Consents
After the final agreement is signed but before it closes, the seller of the rep firm will obtain principals’ consent to the transaction. In addition, sellers’ contracts with third-parties—such as the seller’s landlord and equipment lessors—usually require those third-parties consent to a sale of the business.
At the closing, the business will finally be transferred to the buyer and the purchase price will be paid to the seller. If the transaction was structured as an asset sale, each of the assets being sold must be conveyed at the closing. If the deal involved seller financing, the seller may suspend a transfer of ownership until the buyer pays off the debt.
How to buy or sell a manufacturers’ rep agency?
Today we’re talking about best practices for buying and selling a manufacturer’s rep agency. What should you know as a buyer? What should you know as a seller? Now this video hits at a real high level. See the description below for a link to my article on this aaronhall.com, and you can see a lot of best practices and pitfalls to watch out for.
Now there are some interesting issues that are somewhat unique to selling or buying a manufacturers rep agency as opposed to other businesses out there. First off, a manufacturers’ representative agency has one or more manufacturers who are principals, and typically the agreement with those principals is the principal has a right to terminate the agreement, or to at least consent if there’s any sort of sale or transfer of ownership. So, that’s an important piece.
Second, typically this transition is not instantaneous. It takes a number of years. The seller wants to help the new sales rep who’s buying the agency get familiar with the customers or the clients, and build that trust and rapport with them. Likewise, build the trust and rapport with the principal, the manufacturer. So typically, you have a multiple year handoff.
Now, there are a lot of different ways to structure this. The first question is, “When does the ownership transfer?” Does it transfer at the beginning of a multiple year transition? Does it transfer over time? Or does it transfer at the end? For example, I’ve seen many deals where the buyer will pay for five years, and upon making the final payment, the shares transfer to the buyer. And a principal, the manufacturer, will give consent at that time. And by that time, the principal has already gotten to know the buyer so well, because for years the buyer has been their main point of contact. The principal feels very comfortable with that. Conversely, I’ve seen where the buyer gets the shares right away, the principal signs off on the deal, or a hybrid of that.
Now, another important part of this is the seller wants to make sure they get paid. The buyer wants to make sure that they have a revenue stream, a profit stream coming in, and that it’s as good as the seller purports that it is. One problem that often comes up is buyers remorse. The buyer says, “The business wasn’t in the condition I expected. I assumed the relationships were better, I assumed the manufacturer or the clients were better, or there would be higher volume.” Conversely, sellers often say, “Hey look, the buyer isn’t working as hard as I was, or as effectively as I would, or the buyer did something wrong, or the buyer hurt the relationship with the principal.” So there’s a lot of potential for problems to arise here.
Other complexities that come up is you may have multiple owners in the manufacturer’s rep agency selling to another generation, a new set of owners, maybe one or more. And so, you have to think through, “What does that buyout look like?” And often, there are different competing interests of the sellers. Some want to just get out and they’re willing to take a discount. Others want to get paid over time and they’re most interested in maximizing what they’re paid over a five year period. That raises the question of, “How do you appraise the business?”
I can’t get into all the details, but the simple version is that you typically look at a period of revenue, maybe a year, maybe a year and a half, and that would be perhaps the sale price, but a lot of things will affect that. How strong is the relationship with the principal? And with the clients or customers? The stronger the relationship, the more people are locked in for years, the greater the sale price. Also, if the