Insurance Agency Acquisition: Due Diligence Checklist

If acquisition is part of your agency growth strategy, it is critically important that you put time into understanding the agency or book that you’re considering purchasing. Doing your due diligence homework will ensure that you know exactly what you’re getting and whether it’s a strategic fit for your business. You want to assess the agency's financials, operations, and strategic fit with your business. You also want to think about how best to finance the purchase.

This checklist should support your due diligence process, as you consider the purchase of an agency from multiple angles. (We'd also suggest that you check out our podcast on due diligence.)

FINANCIALS

It takes time to research and review financial information for a privately held company. You should plan to focus a majority of your time and energy on verifying the seller’s financials and the status of the book of business.

Conduct a full financial review

• Are profit and loss statements and balance sheets available?
• Are standard accounting practices followed?
• What do the agency’s expenses look like? Do you believe you could run the business more efficiently?
• What are the current annual premiums?
• What are the current annual commissions?
• Call in experts as needed to review bank statements for operating and trust accounts.
• Are the trust accounts appropriately funded and have they been used only for paying premiums to the carriers?

Production trend data

• Request commission reports, retention rates, agency management system reports.
• Request a list of carriers, and understand the percentage each represents in the overall book.
• Understand what types of policies are in their book.
• Have they added or lost carriers? How would they characterize their carrier relationships?
• Is the bulk of their business in one or two accounts, or spread over many?
• If the book is mainly commercial policies, when do they renew?
• How long before you would receive commissions?

Existing contracts and agreements

• Are there non compete agreements in place with existing employees?
• Will the non compete agreements transfer?
• Will existing carrier contracts move with the new acquisition?
• Are there agreements or contracts you would be responsible for carrying out?

Tax status

• Does the agency have a history of paying their taxes fully and on time?
• Are their taxes filed and current at the time of your review?
• Do you notice any unusual line items? Ask for additional information.

Insurance and legal

• Will your acquisition be covered through the transition period for professional liability, errors and omissions, worker’s comp and data breach?
• Are there any outstanding legal issues?

Loans and debt

• What’s the status of their loan debt? 
• What are the dates and amounts of payoffs?
• Are there liens on any assets? 
• Who are the lien holders and have they filed a UCC lien?

OPERATIONS

Assess whether your target’s everyday operations will merge easily into yours. Visit the agency to experience the office first-hand. Get to know the staff.

Geography, location and property

• Is the office in a good location?
• Will you consolidate sites or maintain two locations?
• Which of the hard assets will you acquire?
• Will you negotiate for computers, equipment, software?

Employment and management issues

• Will you need to hire or lay-off staff?
• Who are the top performers in the agency?
• Are there key client relationships you must maintain?
• Will the seller provide the proper introductions to facilitate the transfer?

Technology and intellectual property

• Are client files kept electronically or on paper?
• Do they carry the necessary insurance?

Network affiliations

• Does the agency affiliate with networks? 
• Will any affiliation affect your sale, transfer or financing?
  

STRATEGIC FIT

Make sure you understand and are capable of marketing to and serving the agency’s customer base.

Complementary books?

• Will the new book integrate well with your existing books?
• Can you service the business with existing employees?
• Will you be expanding into new markets? 
• Do you know and understand the customer base?

Competitive landscape

• Are there new challenges associated with the purchase?
• How will you market the new book?
• Do you know what has/has not worked for the current owner?

FINANCING

Once you’re sure this is the right acquisition, you need to start arranging basic financials. It's really never too early to meet with a lender and get a conversation started about the possibility of funding an acquisition.

Arrange basic financials

• Can you come to the table with a down payment in place?
• How much additional financing will you need to complete the acquisition?
• Is the seller willing to finance a portion of the purchase or negotiate a buyout plan? Obviously, the more equity you can arrange, the lower your financing costs will be. Also, it’s useful to keep the seller engaged with you even after the acquisition is completed.
• Keep in mind that a good rule of thumb in agency acquisition financing is 20% should come from the buyer, 20% from the seller, and the remaining 60% from a lending partner.
• Would your cash flow support the loan you’d expect to take out?
• Can you/should you get pre-qualified
  

For more insights into financing, check out our Insurance Agency Acquisition Financing Checklist.

Schedule a complementary 30 minute consultation with an AgileCap Lending Advisor to review your acquisition and lending requirements, using the form below or "Schedule a Consult" button at the top of the page. Learn how we can customize a loan for your specific needs. The consult is easy and quick, and there’s no risk or obligation.