M&A Due Diligence for Insurance Agencies

The three places agencies hide problems

Most agency acquisitions go sideways for predictable reasons. The seller knows about the problems; the buyer doesn't ask the right questions; the deal closes; the buyer discovers things in the first 90 days that should have been disclosed.

The three places to look are: the trust account, the commission contracts, and the producer agreements.

Trust account diligence

• Pull 12 months of trust account statements. Reconcile against carrier statements for the same period. Drift of more than $5k between trust account balance and what should be there is a major flag.
• Ask the seller for the most recent state department audit findings. Read every comment.
• Confirm the trust account is segregated from operating accounts and has been for the entire diligence period.

Commission contract diligence

• Get a copy of every carrier appointment + commission schedule, including contingencies. Read the termination provisions; some carriers have language that lets them claw back contingencies if the agency changes ownership.
• Confirm contingency targets for the current year and next. A seller may show strong run-rate commissions that depend on hitting a target the agency will miss after the sale because the producer relationships changed.
• Ask about premium finance arrangements. Are there outstanding PFC agreements that travel with the acquired book?

Producer agreement diligence

• Get every active producer agreement. Look for change- of-control clauses. Some allow the producer to walk away with their book on closing.
• Look at trailing-12 production by producer. The top three producers should account for less than 60% of new business. If they account for more, your acquisition is essentially three contracts, not a business.
• Ask whether any producers are negotiating to leave or expanding into competing roles. The seller will say no. Verify by talking to producers individually, under appropriate confidentiality.

What you can fix post-close

Almost all back-office issues — AMS migration, reconciliation discipline, certificate workflow.

What you can't

Cultural mismatch with the senior producers. If they don't want the deal to work, it doesn't.