ACG - Agency Consulting Group

The PIPELINE

A national monthly newsletter for agency principals dedicated to agency management topic

Producer Contracts

ANY AGENCY THAT ENGAGES THE SERVICES OF PRODUCERS OR SALESPEOPLE WITHOUT THE PROTECTION OF A CONTRACT IS SITTING ON A PRESSURE SENSITIVE BOMB - IT WILL ONLY REMAIN STABLE AS LONG AS IT IS NEITHER PRESSURED NOR SHOCKED.

Producer contracts are written at the beginning of a relationship or when a relationship changes in order to make the conditions of the relationship stable and understandable by all parties and to protect both the producer and the agency from a change in that relationship.

At the outset (when a producer is hired) the contract should establish the producer's duties and the agency's duties, how and how much the producer is paid and remedies in the event that either the agency no longer wishes to employ the producer or the producer no longer wishes to participate in the agency. The signature of both parties on the contract is a condition of acceptance of employment by the producer with the agency.

Changes in a relationship are also opportune times to initiate a producer contract. Those changes could include equity positions, compensation changes or changes of responsibilities. In order for a contract to be inviolable when negotiated sometime after a producer has been employed with an agency, a reasonable consideration should be paid to substantiate the contract.

Formalizing a producer's responsibilities to the agency and the agency's responsibilities to the producer in the written form of a contract is a protective device for both parties. The producer is further protected by the definition of the compensation program under which he is willing to function as an employee of the agency. A separation clause which identifies the agreed upon terms of separation in the event that the producer decides to leave the agency or the agency decides to no longer employ the producer is also a protective device for both the producer and the agency.

We'd like to suggest a different type of separation clause for producer contracts that seems to be working well in a "win/win" situation. We suggest that whether or not a producer holds an equity opposition in the agency, the appropriate separation clause provides for the possibility of the purchase of the producer's book of business depending upon the conditions of separation.

Producer with equity

If a producer has achieved equity in the agency, the separation clause is rather simple. If the agency decides to terminate the producer, it should be responsible for the complete payment of the value of that producer's stock in lump sum within thirty days after termination. If the producer terminates, the agency should purchase the producer's stock in an installment sale over a 3 - 5 year period (at appropriate interest rates). Either of these purchase option are in sponsorship of the non-competition clause which should also be a part of the producer contract.

If the producer owns equity (her) book of business, the scenario is a bit different. Insidiously, the agency has defined a specific book of business for which the producer is responsible. In the event of the termination of that producer by the agency or the departure of that producer from the agency a cooperative buy/sell agreement for that book of business will avoid many harmful and expensive litigation situations. We suggest that the offended party (the producer who was terminated or the agency that the producer left) be given the right of first refusal to purchase the other party's equity position in that book of business. Using this scenario, we force the fair pricing of that book of business. If the producer is the offended party (he has been fired) the agency sets the price for the book of business and the producer has the option of either purchasing it from the agency or selling the balance of the equity in that book of business to the agency. If it was the producer's decision to leave the agency, the producer sets the price of the book of business and the agency has the opportunity to either buy the producer's equity portion or sell him(her) the agency's equity position.

Of course, we recommend the use of the Agency Consulting Group to establish the fair market value of any agency or any portion of an agency. It is absolutely necessary to have an objective fair market valuation in the scenario of multiple owners of stock in the agency itself. However, if it's desired, you can determine the value of a book of business independently under the circumstance that the other party has the option of either purchasing or selling at that price.

No Equity Ownership

If a producer is not in an equity position in an agency and is either terminated or leaves, the agency would be best served by having a clause in the contract that continues to pay the producer a certain amount of money for each year of a non-competition clause in support and payment for the validity of that non-compete clause. This amount can be as little as ten percent of a producer's last full year compensation based on the continued retention of that level of business. However, the compensation for that non-compete clause must be considered "reasonable". The signature of the producer on a contract which contains a non-compete clause sponsored by a pay-out after termination solidifies the intent of the contract in case it need to be interpreted in a court of law.

Just a reminder - producer contracts with non-compete and non-piracy clauses (non-compete refers to refers to the producers book of business - non-piracy refers to the balance of the agency's business) that are geographically sensitive simply don't work. You can't stop a person from doing the business that they were trained to do in the area in which they live. We have also seen non-compete clauses challenged with durations for more than five years.

Please take this information into consideration when writing or reviewing your producer contracts. The Agency Consulting Group does not represent itself as attorneys nor do we render legal opinions. The information within this article are observations of effective tools used within agencies over the twenty years of our consultancy.