Editorial - From the desk of Paul Clarke

Since developing the Allstate Agency Value Index several years ago, and having helped purchase over 800 Allstate agencies since 2000, I would like to share some learned insight with you, the Allstate agents and the executives and management of Allstate Insurance Company. As always, I welcome your opinion.

A Shepherd Must Protect His Flock

All will agree that a hammer is a physical tool, and if asked, virtually all could quickly express the purpose of that tool.  In that same vein, most understand that a will is a tool designed to express and ensure the implementation of a deceased individuals wishes with regards to his or her property, etc.

In most business acquisition transactions two critical tools brought to bear are the non-compete and non-solicit covenants, which are contained within the purchase agreement. The purpose of this tool is to clearly express the intention of the seller to sell his or her business and refrain from reentering that line of business in a time or place which might damage the value the buyer paid for the seller's business, and by extension, to protect the buyer from catastrophic personal financial injury.

Now, some lose sight of the primary purpose of this tool as they get lost in the length of time the non-compete and non-solicit is to be in force or over what distance of geography it is to cover; that is a lot like losing sight of the purpose of a hammer due to a debate over how hard of a blow is required in a particular instance of hammering.  Clearly the degree of force to be employed in the use of any tool is dependent upon the job at hand.

For purposes of this discussion, the question on the table is, "Is the non-compete and non-solicit tool necessary in the sale of an Allstate Agency?" Again, the question is not to what degree of force it should be applied (i.e. 1 mile vs. 5 mile restriction or 1 year vs. 5 year duration) as the nuances of each individual job dictates the force required, just as would be the case when confronted with the prospect of hammering a two inch nail vs. a railroad spike into a piece of wood.

PPC LOAN has provided financing for over 800 Allstate Agencies since 2000. In fact, given that the majority of the loans provided for the acquisition of these agencies have been for 90% or more of the purchase price, one could argue that PPC LOAN has purchased, in a virtual partnership with various licensed insurance professionals, over 800 Allstate agencies in the last 11 years.

A key role we have played in each Allstate agency acquisition, in which we have provided financing, has been to review the various legal contracts that are necessary in memorializing the various terms, agreements and representations surrounding the sale of the agency. In that capacity, I must say that I have found it amazing to have observed the surprisingly large number of attorneys, some for the buyer and some for the seller, that seemed to not understand the difference between a non-compete and a non-solicit agreement. (You can only imagine the mess that is our experience in deals where there are no attorneys involved).

Non-solicit and non-compete are two separate but very important and necessary provisions or covenants contained within a business purchase agreement. The non-solicit prevents the seller from soliciting purchased clients or employees for a set period of time, and the non-compete prohibits the seller from setting up shop in the same or similar line of business within a certain radius or period of time as the agency being sold/purchased. Combined, they are the foundation upon which the market place of prospective buyers place their confidence in terms of the likely continuance of the historical operating performance of the business following the acquisition.  Removing or weakening one could cause agency values to topple.

Well that covers it, but the reader may be wondering what has motivated me to spend time on this subject? It stems from the seemingly increased occurrence of Allstate agents who are making the decision to stay in the insurance business after the sale of their agency.

Yes, I know Allstate Insurance Companies R3001 contract stipulates a 1 year, 1 mile non-compete with its agents, however, one could assume Allstate Insurance chose this short term and small radius to ensure in front of a jury of peers that a big corporation is not trying to take advantage of poor old Joe Agent who is just trying to make a living.

So what's the deal? There are more and more sellers who say they are "retiring and moving out of state," however, when it comes to negotiating non-compete terms they are not as flexible as someone moving out of state would seem to be. As an agency purchaser or seller, where do you stand on this issue?

I think non-compete and non-solicit terms between a buyer and a seller in their private purchase agreement should be more stringent than those outlined by Allstate Insurance Company in their R3001 agreement (specifically the 1 year / 1 mile provision). My opinion stems from:

1. The key purposes of the non-compete and non-solicit tool is to protect the buyer from catastrophic financial injury.  Some sellers claim that their objection is out of principal and based on the fact that if the 1 year and 1 mile standards set out in the R3001 is good enough for Allstate, it should be good enough for the buyer.  Allstate is far less likely to experience catastrophic financial injury from the post-acquisition encroachment activies of a seller than is an individual buyer with limited personal liquidity and personal wealth.  Consequently, an individual buyer is clearly justified and reasonable in requesting that the non-compete and non-solicit tool be used with a little more force to effectively execute the job he or she faces.
2. A purchaser is paying a premium over the TPP value (the max value Allstate Insurance is willing to pay for the agency) resulting in the purchaser needing a greater level of protection, as there is a greater level of investment risk on the line.
3. It's just the right thing to do. When you sell your business to another human being, you should  transition that business in good faith and genuine hope that your purchaser realizes all the success that you realized when you owned the agency. To do any less is borderline criminal and reeks of faulty character. If competing against the business you sold is your way of "getting back at Allstate", you are sorely mistaken. The damage you do does not even register as a blow against Allstate, but can cause serious damage to your buyer who is simply trying to make a living to provide for his or her family.
4. Simply stated, an agency purchaser does not have the means to pursue a lawsuit to the severity that Allstate Insurance does. Should Allstate decide to make an example out of a seller for violating a covenant, they can make this happen without putting a dent in the old wallet.