Due Diligence Checklist: What to Verify Before Buying an Agency
The 20 things you must verify before signing — because sellers don't always tell the whole story.
Due diligence is where the romance of buying an agency meets reality. The seller showed you a healthy book, growing revenue, and happy clients. Your job now is to verify all of that — and find the things they didn't show you.
Every agency acquisition that went sideways can trace its problems back to something that was missed during due diligence. Here's what you can't afford to skip.
Financial Verification
Pull three to five years of tax returns, not just internal financials. Tax returns are filed under penalty of perjury. Internal P&Ls can be whatever the seller wants them to be. Look for trends in revenue, expenses, and net income. Flat or declining trends need explanation.
Normalize owner compensation. If the seller is paying themselves $300,000 but market rate for the role is $120,000, the difference adds to EBITDA. If they're paying themselves $80,000 and running personal expenses through the business, the actual earnings are lower than they appear.
Identify discretionary versus essential expenses. Country club memberships, luxury car payments, and family members on payroll are add-backs that increase EBITDA. Carrier management fees, AMS subscriptions, and E&O premiums are real costs that transfer to you.
Retention Data
Demand carrier-reported retention rates for at least three years. Do not accept the seller's self-reported numbers. Carrier reports show actual policy renewals, not the seller's optimistic interpretation.
Look for trends. If retention was 95 percent three years ago and dropped to 89 percent last year, something is changing. Rate increases, service issues, carrier appetite changes — any of these can drive declining retention, and declining retention drives declining value.
Loss Ratios
Pull loss ratios by carrier and by line of business. High loss ratios might mean the carrier is about to non-renew a block of business or increase rates dramatically. Either scenario creates retention risk post-acquisition.
If loss ratios are creeping up, find out why. Bad luck with claims is one thing. Systematic underpricing or poor risk selection is another. The first is temporary. The second transfers to you.
Customer Concentration
Run a top-25 client report. Calculate what percentage of total revenue the top 5, 10, and 25 clients represent. If any single client is above 5 percent, assess the relationship stability. If the top 10 are above 30 percent, price the concentration risk into your offer.
Carrier Relationships
Verify every carrier appointment, commission schedule, and bonus agreement. Will the commission rates transfer to you, or does the carrier reset them? Are there minimum premium commitments you'll need to meet? Is any carrier in the process of restricting business in your market?
Call the carrier field reps. Ask about the agency's standing, any pending issues, and their appetite for the book going forward. Carriers will be more candid with a prospective new owner than you might expect.
Staff and Producers
Review every employment agreement, non-compete, and compensation arrangement. Identify key people whose departure would hurt retention. Assess whether they're likely to stay through the transition.
Talk to the staff privately if possible. The seller won't tell you about morale issues, but the team will — especially if they're worried about the transition. A demoralized team is a retention risk the financial statements won't show.
E&O Claims History
Request a five-year E&O claims history. Past claims may indicate systemic operational issues. Pending claims could become your liability. Understand what the E&O policy covers and whether prior acts coverage will extend to you.
Technology and Leases
Audit the AMS, rating tools, and communication systems. Will you keep them, replace them, or upgrade them? Factor migration costs into your offer. Check lease terms for the physical office — long-term leases at above-market rates are a hidden liability.
The Walkaway List
If you find any of the following, walk away or price accordingly: declining retention below 85 percent, customer concentration above 15 percent in a single client, pending E&O claims with uncertain liability, carrier appointments at risk of non-renewal, key staff planning to leave, or books with significant loss ratio deterioration.
Due diligence takes time and costs money — attorneys, accountants, and your own hours poring over spreadsheets. It's the best investment you'll make in the entire acquisition. The deal you walk away from because of what due diligence revealed is worth more than the deal you close without doing it.