Dare to Jump

Dare to Jump Overcoming Noncompetes and Other Roadblocks to a Better Agency Fit

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If someone were to give you $1,000,000 to make a job move, you’d move, wouldn’t you? Now, what if that move meant a couple of lean years? For a million dollars, you’d likely tolerate several lean years. When you’ve got a good-sized book of business, kids heading to college, a mortgage, and a lifestyle you’d like to keep, why on earth would you consider leaving your cushy gig for another opportunity? Because in the long run, you’ll be further ahead than you’ve dreamed possible. For the driven producer, setting your own limits is important. So when you work for an agency that does not allow that kind of freedom, it can be an underlying frustration, one you may not even realize until you see a better option. But when that better option becomes clear, what can stop you? The most obvious answers are a noncompete, what you’ll lose in the transition, and the lack of a guarantee. It’s not easy to take two steps back to take 10 forward. You must have patience, confidence, and, above all, vision. Here, we’ll look at these roadblocks and how to overcome them for the prize of a vastly better future.

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Roadblock

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The “Nons”: Types of Restrictive Covenants and What Your Options Are

Restrictive covenants are all about protection—protect the business and the investment it has made in its producers and clients. These agreements are considered critical to the strength and stability of an agency. Without them, the agency is far too vulnerable to ruin. It also means a diminished valuation of the business. However, the law often recognizes the right to compete for client relationships under the right circumstances; it does not always recognize an ownership of those relationships. There are three main approaches to restrictive covenants. The Noncompete Agreement. A noncompete restricts producers from competing against their former agency by barring them from working in a similar industry within a geographic area, e.g., 50 miles or surrounding counties of an office, for a specified period of time after release from employment, which is typically from six months to two years to be enforceable. It must be considered reasonable for both parties and should not impose undue hardship or be detrimental to the public. The Confidentiality and Nondisclosure Agreement. A nondisclosure restricts the producer from disclosing an agency’s proprietary and confidential information for a specified period of time. One year to 18 months is a typical duration. Agreements may contain a nonpiracy clause and are seen to be less restrictive than noncompetes; moreover, courts are more willing to uphold them when contested. The Nonsolicitation Agreement. A nonsolicitation agreement provides a narrower scope than the noncompete agreement and restricts the producer from soliciting the current or prospective customers or employees of the agency. What Are Your Options? Start by hiring a lawyer to review all of your restrictive covenants to know exactly what your contractual obligations are. While no ethical business leader would suggest an unpleasant or unethical exit from a company, if you are considering a move, it is wise to understand the details of your agreements. In rare cases, they may not be in force or may be rightfully contestable. If you’ve never signed an agreement and it does not come up until you leave, inforum-online.com

you’re lawfully in the clear. In some instances, you may have some room even if you have signed an agreement. For example: • The agency may have overstepped the bounds of enforceability, such as an excessive time period or too broad a restricted territory, and therefore, it may be worth litigating enforcement of the agreement. • For agencies where multiple mergers or acquisitions have occurred, previous contracts may not be in effect. In Acordia of Ohio LLC v. Fishel, an insurance agency filed for injunctive relief against a competing agency and four former employees for alleged violation of the employees’ noncompetition agreement. The court ruled that, although noncompetition agreements from a predecessor entity were inherited by the successor entity, flaws in drafting ultimately rendered the agreements unenforceable. Depending on the structure of the agreement, if the employer entity is not the surviving entity in a merger or consolidation, the transaction may trigger the unintended running of the noncompetition period. After multiple mergers, this case shows that careful wording of the document makes all the difference. • Have the documents been drafted to comply with new state statutes? One producer found that, after Georgia law was changed a few years ago, his contract became unenforceable, and Utah enacted a law in 2016 limiting covenants to a one-year duration. • When an agreement is overly broad or doesn’t include reasonable parameters, it most likely will not be upheld if challenged in court. The courts look for a reasonable balance between the protections of the agency’s business and the employee’s ability to continue to earn a living. With an overreach, you may have grounds to get the contract overturned, although most jurisdictions allow the court to rework the agreement to one that is considered reasonable in that jurisdiction.

When you consider a move and want to have your documents reviewed, if the agency you’re moving to has an attorney, do not depend on their opinion only. Get your own attorney to look things over. Since every state is a little different, it’s important to find someone who is on top of all applicable details and recent developments pertaining to restrictive covenants to determine what is enforceable and what is not.

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I Can’t Disrupt My Finances

Once you have the restrictive covenants question solved, you can look at the money side of a move. You may think you can’t move your book and there are very few options to making the transition worth it without a guarantee. First, there are no guarantees today. Second, there are plenty of options available to people who believe in themselves—because that is really what it boils down to. Your Book You will want to take your book of business with you, and most agencies will allow your book to be purchased. Before you make an offer, research not only the value of your book but also your agency’s past behavior in similar negotiations, which will dictate the amount, e.g., one or two times the revenue. This will be a large commitment, but it will pay in the long run. However, be prepared that some agencies may get into a price war with you. There are several options to covering the cost of purchasing your book: Pay over time. You may have the option to negotiate paying the agency a portion of the commissions earned for a fixed period of time. Many finance the purchase of their book with premium financing. Rates are generally reasonable at four percent to five percent, and some agencies may be willing to guarantee the loan. When you make the move to higher commission rates, you can use the difference to pay off the book purchase, which greatly

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accelerates the payoff. Here is a sample of how that might break down: Current Book: Compare to New Model: Difference Available to Pay Off Book =

$400,000 Renewals at 20% and $100,000 New Business at 40% = $120,000 $400,000 Renewals at 52% and $100,000 New Business at 52% = $260,000 $140,000 per year

Use Leverage. The leverage you have in the negotiations is important to understand. On average, the agency will lose 70 percent of your book over a three-year period. Producers can use this fact when they present their offer to buy the book and negotiate payment. Additionally, agencies know that personnel may need to be let go when producers leave and take revenue with them, at least for a transitional period. There is a lot of risk involved in using this tactic, but it is reasonable and generally pays off in the long run. Two Cautions. Most reputable firms will do anything legal to help move the book. However, if something is contested, that is the responsibility of the producer and illustrates why hiring your own counsel is a wise choice. Additionally, stock may play a huge part in the equation. It can be more valuable than the book. When you leave your agency, you may have to pay the company back, typically over a period of time. This will be another element that you may need to finance. The right agency will be willing to look at every aspect and negotiate with you so that you both win. To see a comparison of your current compensation model with the entrepreneurial model, click here. You may be surprised by the difference.

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OTHER ROADBLOCKS

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• I cannot move my book because I must have a certain level of income. If you cannot purchase your book, an option may be to use a draw. Agencies may offer this option for the duration of the noncompete or other restrictive agreement. It’s important to keep the payoff in mind and remember why this option would still be worth it. • It’s too late in my career. I will not be able to make up the loss, let alone exceed what I would have made without the move, and I’m just too old to start over. If this is your roadblock, you need to calculate carefully what a change would look like. Most find that they make the transition more quickly than they thought possible and were happy they made the change, even later in life. • I’m afraid of the unknown. Ask the questions—you may be surprised by the options available. Your situation may be unique, but don’t shrink from simply asking what is possible. The right agency will work with top performers under all kinds of circumstances. • It’s not for everyone. A jump to the entrepreneurial model is not for everyone; it may not be for you. There are two types for which the most lucrative model does not work: (1) someone who needs to be micromanaged or must have regular meetings with leadership and (2) someone who is not able to work as a partner or split commissions with another producer to work with a client.

What You Gain

In the sample above, a producer in the entrepreneurial model would realize an increase of 30 percent to 40 percent on renewal commissions (on average) and an increase of 10 percent to 20 percent on new business commissions (on average), which equates to a difference of $1.4 million in the first 10 years. This doesn’t even include equity in your book and stock ownership options in your new agency. For the right personality type, the jump is a must. Don’t leave possibly millions on the table out of fear. Ask the questions required to push every roadblock aside. Your future and your family’s future are worth it.

About the Authors Jeff Lagos

Jeff Lagos, CPCU, is president of Insurance Office of America (IOA). He has extensive experience and leadership in the insurance industry including 10 years with a top-tier carrier in various leadership roles and divisions.

Tony Tatum

Tony Tatum is corporate counsel and director of agency mergers and acquisitions for Insurance Office of America (IOA).

WHAT’s NEXT? The path to insurance producer success in one tight package. Be sure to follow us on Twitter and LinkedIn to be sure you get updates on our next release! 5

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Download “6 Questions Producers Should Ask to Ensure Their Company Fits Their Goals” ebook to determine whether your company and compensation model aligns with your personal goals.

Download “The Insurance Producer’s 4-Step Guide to Fast-Tracking the Next Move” ebook to ensure you cover all the bases for finding and comparing compensation models. Includes important checklist, too.

Download “The Top 5 Insurance Agency Tools Important for Producer Success” ebook to gauge whether your agency is providing to tools you need to stay competitive in today’s challenging market.

Download “The 3 Freedoms Key for Ultimate Producer Success” ebook for a look at the top areas where freedom is imperative to achieve your best.

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