Mark Pestronk
Q: Our agency has been presented with an interesting opportunity: One of the ICs who works with our agency would like to retire and hand over her client base to us. In return, she would like to be paid a percentage of commissions for a number of years. We would like to proceed with this deal, but we don't know what kind of contract we need. Is it just a regular IC agreement, a separate kind of referral agreement, or is it an acquisition of her client list?
A: There are pros and cons to each type of agreement. With a regular IC agreement such as the one that you probably have for your agency's ICs, the advantage is simplicity: You already have a standard agreement, and it can be adapted by deleting the irrelevant parts, such as the duty to handle travel arrangements for her own clients and the duty to follow your fraud-prevention rules.
The biggest drawback to the typical IC agreement is that the IC can take back his or her clients at any time and move them to another host or handle them directly with suppliers, bypassing your agency. You have no ownership rights to the client list.
With a referral agreement, you can pay a percentage of your commission as a referral fee, and you even provide that the clients will belong to you once you start handling them, but there are two disadvantages to such an arrangement. First, unless you provide otherwise, you may end up paying referral fees on the same clients' trips for the rest of the IC's life and possibly longer if the IC is a corporation or limited liability company.
For referrals of corporate clients, a typical number of years is no more than two or three at most, so a corporate-client referral agreement does not really have this open-ended problem. On the other hand, if the clients are leisure clients, the IC may well expect a cut of the revenue for each trip for an unlimited number of years.
The second downside of a referral agreement is that, even if you provide that the clients belong to you, the IC can solicit them away if the IC decides to go back into the business or assist another travel advisor to solicit them.
From your point of view, the best form for this transaction is an acquisition, and it should take the form of an asset purchase agreement. Even though there are no fixed assets such as a location or furniture, a client list is still an asset and can be purchased.
The agreement would set the purchase price at a percentage of the clients' future revenue for two or three years. Most importantly, the seller IC would agree not to handle the clients on the client list (or otherwise compete with you) for a longer period.
If the IC truly plans to retire, she should have no problem with the noncompete.