Passing the torch: A transition playbook for today’s rep firm leaders

by Adam Glazer and Adam Maxwell
SFBBG

Succession planning is one of those tasks that is often on “tomorrow’s to-do list,” until all of a sudden that day is today. Whether retirement snuck up on you or the unexpected has accelerated your timeline, having a succession plan in place is instrumental in ensuring your rep firm continues on. A strong succession plan isn’t just about selling your business, but about protecting your legacy.

Start early

Succession is a process, not an event. Ideally, planning should begin five to 10 years before an anticipated exit so the firm has time to develop internal talent, evaluate market options and prepare principals for anticipated changes. Even if you’re not planning to transition the business in the near term, having a roadmap in place hedges risk to the rep firm, successors and principals alike.

Internal successors need incentives and a clear path to ownership.

Early planning allows time to draft and execute key documents like a buy-sell agreement, negotiate assignment-ready principal contracts, implement employment agreements with appropriate non-disclosure and restrictions for successors and roll out appropriate incentive plans, if necessary or desirable. It also allows you to get the firm’s legal house in order, such as by confirming corporate formalities, updating operating and shareholder agreements and standardizing rep contracts.

Who’s next?

One common succession path is internal: family members or a long-time team member, or developing a new hire. This approach takes time and commonly requires intentional investment in the next generation by delegating client relationships, exposing them to financials and including them in strategic planning.

If developing an internal successor, a tailored employment agreement may be advisable. With or without an employment agreement, any potential successor will likely desire a defined path to ownership, but the firm should structure the matter in such a way to protect itself by not over-committing too early and by requiring appropriate non-disclosure, non-solicitation and narrowly drawn non-compete or forfeiture provisions.

Internal sale vs. market sale

If there’s no logical internal candidate, exploring the market for a sale may be an option. This could involve another rep firm looking to expand or a private buyer who sees value in the firm’s book of business. Increasingly, private equity firms get involved in these situations. Market sales typically require more formal preparation, including due diligence of financial statements, customer and line analysis and perhaps retaining a business broker to manage valuation and buyer sourcing. Rep firms are well-advised to pay close attention to due diligence disclosures, representations and warranties and indemnification clauses in a purchase agreement.

Internal transitions typically involve seller financing or long-term earn outs, requiring different types of documentation such as promissory notes, security agreements or personal guarantees and default and acceleration clauses.

Principal contracts: Assignment & consent

A critical piece of any rep firm transition is the status of the principal agreements, including the ability to assign them. Many purchase agreements have conditional closing clauses that are tied to principals’ consent. This means that under some principal-rep agreements, you cannot simply “hand over” the line card in connection with a sale.

No rep firm transition is complete without principal buy-in. Principal buy-in, especially if consent is required, should be secured with plenty of lead time and transparency about the successor’s qualifications. It is generally good practice to negotiate assignment provisions in advance or include language that permits assignment in connection with a sale. Alternatively, a rep firm can consider using “novation agreements,” where the principal expressly agrees to substitute the buyer into the contract.

The $64,000 question: Valuation

Rep firm valuation isn’t an exact science.

Common methods include:

• EBITDA multiples

• Revenue multiples based on trailing 12-month commissions

• Discounted cash flow models

• Custom formulas (e.g., percentage of annual commissions over a set period)

Various professionals are available to assist in valuing a rep business, when necessary. The valuation method chosen impacts the structure of the deal.

Post-sale consulting arrangements

Buyers often want the seller to remain available for consulting during a post-sale handoff period to provide advisory services, introduce the buyer to key contacts and smooth the transition with principals, among other things.

A consulting agreement bridges the gap between transition and independence, and should be structured like any other deal.

Any such agreement should include the scope of duties and deliverables, duration and payment terms, termination provisions, and confidentiality, non-compete and IP clauses. It should also be clear about whether the consultant will be treated as an independent contractor or employee, as this designation will carry significant tax and liability implications.

Payout structures

A typical payout structure might include a down payment at closing with annual payouts tied to performance or revenue targets and seller financing secured by promissory notes. Seller financing requires formal documentation, which may include promissory notes, security agreements, UCC filings on business assets and personal guarantees. Additionally, earn-outs need mechanisms for verification and minimum payouts to protect sellers.

Other legal and practical considerations

• Buy-sell agreements: If the firm has multiple owners, a buy-sell agreement can govern forced buyouts, death/disability exits, valuation and financing terms.

• Tax implications and liability: The legal structure of the business, as well as the structure of the sale itself (asset vs. stock) will affect a variety of liabilities, including business liabilities and tax liabilities such as capital gains treatment and depreciation recapture. Early coordination with tax counsel is recommended.

• Continuity planning: Powers of attorney, key person insurance and succession contingency plans are essential in case of incapacity or death before a planned exit.

• Restrictive covenants: Scope and duration should be carefully negotiated, narrowly tailored and clearly drafted. In certain jurisdictions, these provisions can prove difficult to enforce.

• Data and IP protection: CRM systems, customer lists, financial records and proprietary data should be addressed in the purchase agreement with confidentiality protections.

Final thought: Begin with the end in mind

Whether your exit is 15 months or 15 years away, the best time to start planning is now. Employing a legal and strategic framework strengthens your business, protects your legacy and ensures that the relationships you’ve built over decades continue to thrive.

If you haven’t started the conversation, there is no time like the present. Your future self (and your successor) will thank you.

Adam Glazer

Adam Maxwell

Adam J. Glazer and Adam Maxwell are attorneys with law firm SFBBG, and serve as general counsel to ERA. They advise reps and rep firms on transactional strategy, succession planning, contract drafting and commission recovery. You may contact Adam Glazer at adam.glazer@sfbbg.com.

.You may contact Adam Glazer at 312-648-2300 or by email at adam.glazer@sfbbg.com.