Strategic Resources for Your Insurance Agency

Verify what you are Buying: Due Diligence for Insurance Agency Acquisitions



You’ve decided the time is right to sell your insurance agency, and a potential buyer is interested. After some conversations, it appears that both sides are serious about making a deal. Before that can happen, the part of the process that can make or break it must happen: The “due diligence” phase.

Due diligence is the process where “the buyer verifies that what he’s buying is what he expects,” says Jon Persky of insurance management consulting firm Optimum Performance Solutions. More formally, Marc Greene of General Insurance Brokerage, a firm that specializes in insurance industry mergers and acquisitions, describes it as “the appraisal of a business undertaken by a prospective buyer.”

According to Trevor Murgio of Merger & Acquisition Services, Inc., there are three types of due diligence:

  • Legal. This includes things like licenses, carrier contracts, errors and omissions claims or lawsuits, employee and independent contractor contracts, non-compete agreements, leases, and other contracts (such as agency management system subscriptions.)
  • Operational. This includes business and marketing plans, agency and technology procedures, employee handbooks, benefit plans, organization charts, salary rosters, and schedules of assets and intellectual property.
  • Financial. This includes tax returns, bank statements, accounting records, carrier production and loss reports, detailed verification of pro-forma adjustments, contingency and bonus income, verifications of customers and revenue, and a list of key accounts.

Demands for documents vary with the size of the transaction. “The bigger the firm, the more complex the due diligence process,” Sam Patterson, CEO of insurance management consultant Springtree Group, says. To limit the amount of time and effort, Persky advises preparing certain minimum information in advance. “Don’t prepare more until it’s requested,” he adds.

Assembling all of this information can take some time, depending on the agency’s state of organization. It also depends on how much time the agency can devote to compiling it, says Mike Mensch, M&A Master Intermediary for Agency Brokerage Consultants. “I’ve seen the collection process take as short as one week and as long as eight weeks.”

Timing can be a factor. Joel Farley, CEO of Ron Christopher Co., Inc. notes that, if an agency requests financial documents from its accountant during tax season, a response may take several weeks. “However, this same request may only be a day or two during the slow period of the year for the CPA.” Persky says that documents should be in electronic format, if possible, as buyers will want them to be uploaded.

Sellers should prepare ahead of time for due diligence. “Buyers may not be patient enough while you fumble around gathering due diligence,” says Farley. Patterson adds that being unprepared can turn buyers off. “The appearance of the seller not knowing and not having detail about what is going on in their own shop, and the potential for a significant unknown negative issue coming out during the due diligence period or post close,” he says, “can and does kill deals.”

Greene says that it should be unnecessary to enlist outside help, as the agency should already have the information. The exception may be the most current financial statements, which the CPA can provide. Murgio says that attorneys can also assist.

However, M&A consultants can help put the data together before the buyer sees it. Mensch’s firm runs a pre-due diligence on clients before they go to market. “The purpose,” he says, “is to collect data upfront to (1) check for potential issues that might arise during the sale process and (2) minimize collection time later so we can keep the transaction momentum.” Murgio’s firm creates a secure data room for its clients, though some buyers want to use their own internal resource.

The seller should also perform due diligence on the buyer. “Where’s the financing coming from?” Persky asks. “Sellers absolutely must do due diligence if they are going to hold the note.” Greene says sellers should find out the buyer’s plans for retaining their employees and servicing their clients.

In the end, as Patterson says, “This process, in most cases, is the biggest financial transaction in an entrepreneur’s life. In our opinion, it should not be handled haphazardly.” Agency sellers need to approach the due diligence process seriously to ensure a deal that works well for both parties.

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