There is no question that insurance agencies in Massachusetts are consolidating. There are a myriad of reasons why. The advent of “Managed Competition” in automobile insurance to baby boomer agency owners reaching retirement age. In this dynamic insurance environment, existing owners of agencies should be on the lookout for opportunities to acquire or to retire an agency.
The information provided in this checklist is not intended to be used as a legal template or considered to be legal advice for any particular situation or party. It is essential to consult with an attorney regarding the specifics of any legal transaction .
This checklist relates to those less formal and non-binding written documents detailing, in general or specific terms, the intentions of parties in considering and executing a final and binding contract regarding an agency purchase or sale. The documents may go by the name “Term Sheet”, “Term Schedule,” “Memorandum of Understanding,” “Letter of Intent” or “Letter of Interest.” In this article, these various documents are identified as “term sheet, memorandum, or letter” in the balance of this checklist.
While these documents usually are nonbinding precursors to legally binding, formal purchase and sale agreements, it is important to understand the potential ramifications of the language utilized in these term sheets, memos, or letters documents. First off, legal advice should always be sought out before putting pen to paper with regards to an agency purchase and sale. Without the proper legal advice an agent may fall into a a trap for the unwary in which a term sheet, memorandum, or letter inadvertently becomes a binding agreement with terms that prejudice one party or the other.
The following are questions and items to consider in negotiating the purchase and sale and documenting it with a term sheet, memorandum, or letter outlining the terms of the proposed purchase and sale.
If you and the other party involved in the transaction have mental telepathy and, therefore, know exactly what the other is thinking, then yes, a term sheet, memorandum or letter of intent is not for you. For the rest of us, in an economic transaction where one party gains at the expense of another based upon the terms and conditions of the agreement, a term sheet, memorandum, or letter outlining the terms of the proposed purchase and sale has the important function of resolving potential conflicts or disagreements. When there is no written documentation of the proposed terms between the purchaser and the seller the possibilities for costly misunderstandings or misapprehensions of a party’s true intention are multiplied. This can lead to recriminations between the parties that ultimately kill the purchase and sale. Such misunderstandings or misapprehensions can be avoided by the parties jointly preparing a term sheet, memorandum or letter which spells out the terms of the proposed purchase and sale.
A term sheet, memorandum or letter can provide a purchaser with the time to investigate the details and potential outcomes of a purchase. The time allowances and conditions contained in these documents create a space within which the purchaser can discover issues that can be resolved prior to entering into a binding contract. A seller will have an opportunity to explore and understand whether the purchase is in its best interests and is a viable deal.
These documents are usually utilized when the initial discussions have reached the level that more formal due diligence, exclusivity of negotiations and confidentiality become required, but before the drafting of a final proposed purchase and sale agreement.
These documents are generally not considered to be binding contracts, but it never hurts to reemphasize that fact in the term sheet, memorandum, or letter. However, there is nothing that prohibits a term sheet, memorandum, or letter from explicitly including binding terms into their language, in areas such as: confidentiality agreements; levels of cooperation from the seller; agreements to perform due diligence; access to information; exclusivity for the buyer within a specified time-frame. Also, there is the possibility that parties drafting a term sheet, memorandum or letter without professional legal assistance can draft terms that unwittingly create a binding obligation that prejudices one party or the other.
The rule in Massachusetts is that expressions of “a present intention” contained in such term sheets, memorandum, or letters are not legally binding as contracts unless explicitly stated to be binding. If specific terms in such a term sheet, memorandum, or letters specify or clearly evidence that there was an intention to have a binding agreement, however, the courts can enforce such terms as binding upon the parties.
These documents can have as many terms and conditions as the parties think are necessary or useful to move the proposed agency purchase and sale forward to a closing. Some of the specifications that may find their way into such agreements are:
The above list of what might be included in a term sheet, memorandum or letter is hardly exhaustive. Specific proposed purchase and sale agreements may have more or less specifications depending upon the size and complexity of the proposed acquisition.
In sum, the following is a general guideline of things to keep in mind when negotiating the purchase or a sale of an agency and documenting the proposed agreement.