In the past Agency Consulting Group has counseled you to:
Never hire a producer without having a signed employment and non-compete or non-piracy agreement.
(. . . but you didn’t listen)
Never allow a producer to own his book of business .
(. . . but you didn’t listen)
Make sure that if a new producer is coming from another agency and he insists on owning the book he is bringing over, that he provides you with a written list of the accounts.
(. . . but you didn’t listen)
Not make any loans to producers or other employees.
(. . . but you didn’t listen)
Enforce the terms of the loan and get collateral if you do insist on making a loan.
(. . . but you didn’t listen)
Make producers pay for accounts receivable that have gone bad when they go bad, not years later.
(. . . but you didn’t listen)
Now, one of your worst nightmares has come true. A producer has announced that he is leaving your agency to join the one across the street. He has thousands of dollars in bad debts, owes you tens of thousands of dollars in unrepaid loans, and has never signed a non-compete or non-piracy agreement. And he doesn’t have the money to repay you. What are you going to do?
Hopefully, all the outstanding issues can be resolved amicably. In many instances they can’t. Realize that every concession (in writing) that you get out of him puts the agency in a better position than it currently is. Consolidate and resolve all the pertinent issues in one document.
If the loans that you made to him are in writing and have a requirement to pay the entire amount “On Demand” or “Upon Leaving,” think about the consequences of enforcing it. If this will force the producer into bankruptcy, you may not collect anything. If you don’t want to enforce it, that doesn’t mean you shouldn’t use it as leverage. Remember, producers have big egos. Bankruptcy could be devastating to that ego.
Calculate just how much the producer owes you in bad debt and loans. Take this figure and determine how many of his accounts would have to renew to pay off the debt. For example: If the producer owes you $50,000 and he has a $150,000 book of business, four months of renewals would have to occur to pay off the debt.
Since some months are heavier renewal months than others, you should do an actual calculation. If the producer is leaving on July 31, start with the August renewals and keep adding them up until you reach the amount he owes you. Then keep going for a while longer. The more months you can get, the better. Deal with him from a position of strength, not weakness.
Let’s say that the renewals through the end of the year will pay off the debt. Propose to the producer that your agency will keep 100% of his renewals through March 31st. The extra three months will cushion you against non-renewals, take into consideration that not all the accounts will move, and give you some extra time to hire a new producer to replace the lost book of business. What’s that you say? The producer will starve since he’s going out on his own or being paid on a straight commission basis? Too bad. That’s not your problem!
If the producer will not agree to the above, at least get him to sign a loan document that lists principal, repayment terms, rate of interest, and most importantly collateral. So what if his house and car are mortgaged. Get a first, second, third, or fourth mortgage on everything. Get his wife to sign the agreements if you can. A Confession of Judgment is great, if you can get it. Tie him up every which way you can. Then, if he wants to sell or refinance his house, he’s got to satisfy you.
Remember, any part of the loan that is forgiven is compensation to the producer and you should issue a 1099. What’s that you say? The producer doesn’t have the cash to pay the IRS? Too bad. That’s not your problem either!
You also need an agreement stating what accounts he can take and what accounts will be retained by the agency. The consideration for him signing this agreement is the restructuring of his debt to the agency. Let the producer provide a list of what he wants to take. The agency will dispute any accounts that do not belong on the list but will remain silent if the producer forgets to list an account. If the producer asks the agency to provide the list, that’s O.K. but tell him it will take several weeks to put the list together. This is nothing more than a delaying tactic.
Just because the producer is entitled to take an account doesn’t mean that he is entitled to take the file. For E&O reasons and to properly service the client, you must retain the file. If the producer wants a copy of a file and he is entitled to it, charge him for the time it takes someone to copy the file and for the cost of the photocopy as well.
Laws regarding these issues vary from state to state. We recommend that you retain counsel to assist you, even if you don’t think it is going to get nasty. Your ex-producer has probably already discussed the matter with his attorney. As always, Agency Consulting Group can assist you in preventing problems like these from occurring by instituting the proper systems and procedures.