Buying an insurance agency: what to check in the book of business
Short answer
An insurance agency's value is its book of business: policies that renew and pay commissions. When buying one, verify commission revenue from carrier commission statements by carrier and line (personal, commercial, life and health), split new from renewal commissions, measure policy and client retention, and understand contingent or profit-sharing commissions separately. Then check carrier appointments (which don't automatically transfer and need carrier approval), producer agreements and who 'owns' the clients, licensing, and errors and omissions history.
Insurance agencies are among the most recurring of small businesses: clients renew every year, and carriers pay commissions each time. The value depends on how many renew, through which carriers, and whose relationships they are.
Independent vs captive agencies
An independent agency is appointed with several carriers and owns its book of business, subject to its agreements. A captive agency sells for one carrier under an agent agreement, and in many captive arrangements the carrier owns or controls the book, so what can be sold, and to whom, is set by the carrier. Before you go further, find out which kind of agency you're looking at, read the carrier or agent agreements, and confirm with the carrier what a buyer would be able to own.
Revenue breakdown
| Revenue | Quality | Check |
|---|---|---|
| Renewal commissions | Highest | By carrier and line, 3 years |
| New business commissions | Depends on producers | Who sold it, trend |
| Contingent / profit-sharing | Volatile | Separate; average several years |
| Fees | Varies | Allowed by state rules; disclosed |
What to verify
- Carrier commission statements (24 to 36 months) and bank deposits.
- Agency management system: policies in force, clients, retention by year.
- Carrier agreements and appointment conditions; conversations with key carriers.
- Producer agreements: compensation, book ownership, non-solicits.
- Licences (agency and individual); E&O insurance and claims.
- Premium trust accounting where the agency handles premiums.
Worked example: retention is the value
Illustrative example, not a real agency or commission rates
An agency earns $900,000 of commissions: $540,000 personal lines and $360,000 commercial. Policy retention (policies renewed ÷ policies up for renewal) was 86% in personal lines and 90% in commercial last year. If nothing new is written, next year's commission base is about $540,000 × 0.86 + $360,000 × 0.90 = $464,400 + $324,000 = $788,400, a loss of $111,600. Producers wrote $130,000 of new commission last year, so the agency grew about 2% net. Now take a 4-point drop in personal-lines retention after the sale (clients unsettled by a new owner or a carrier change): $540,000 × 0.04 = $21,600 less a year, every year. Retention is worth measuring by line, by producer and by carrier, from the agency management system and carrier statements.
Carrier appointments, producers and premium trust
An independent agency sells through carrier appointments, and those contracts are with the agency and its principals. A change of ownership usually needs each carrier's consent, and carriers can decline, especially if the buyer has no agency history or the book's loss ratios are poor. Talk to the top carriers (with the seller's permission) before the LOI is final. Producer agreements decide who controls client relationships: some producers own or are vested in their books, and weak non-solicits mean they can leave with clients. Agencies that collect premiums hold them in trust for carriers under state law; ask for premium trust account reconciliations, because a shortfall is a serious problem that can follow the agency. Agency and individual producer licences are issued by state insurance departments, and you'll need your own.
Structure notes
Agency deals often use retention-based payment terms, because the risk is clients leaving after the sale. In SBA 7(a) acquisitions seller earnouts are prohibited (buyer rebates are allowed), so contingent payments have to be structured with your lender, often through a seller note or a price set after a retention review. Agencies are also discussed on revenue multiples; convert to an earnings view before comparing. See revenue multiples. We don't value deals or publish multiples we can't verify.
Worked example: contingent commissions are not renewals
Illustrative example, not real carrier programs
An agency's revenue over three years: $820,000, $860,000 and $940,000. Looks like steady growth. Carrier statements show that contingent (profit-sharing) commissions were $20,000, $25,000 and $95,000; the last year's jump came from one carrier's bonus for an unusually low-loss year. Without contingents, revenue was $800,000, $835,000 and $845,000: growth of about 1% last year, not 9%. Contingent income depends on carrier programs, loss ratios and volume thresholds that can change, and a new owner may not qualify the same way. Separate it, average it over several years, and don't count a peak year as normal.
What moves the value of an insurance agency
We don't value deals or publish multiples we can't verify. Appraisers and lenders weigh these factors:
| Factor | Supports a higher value | Pulls it lower |
|---|---|---|
| Retention | High, stable policy retention by line | Falling or unknown retention |
| Carrier mix | Several carriers, appointments likely to continue | One carrier, or carriers reluctant to reappoint |
| Book ownership | Agency owns the book; producer agreements protect it | Producers own or are vested in books |
| Line mix | Commercial and personal, diversified | One line exposed to market changes |
| Contingent income | Small share of revenue | Large share from profit-sharing bonuses |
| Systems | Agency management system with clean data | Paper files, poor data |
Documents to request
- Carrier commission statements for 36 months, matched to bank deposits.
- Agency management system reports: policies in force, retention by line and producer.
- Carrier agency agreements and any notices.
- Producer agreements, compensation and book ownership terms.
- Licences, E&O policy and claims, department of insurance complaints.
- Premium trust account statements and reconciliations.
- Tax returns, financial statements; lease and staff roster.
Questions to ask the seller
- What are commissions by carrier and line, new and renewal, for three years?
- What was policy retention by line and by producer?
- Which carriers have you told about the sale, and what did they say?
- Do any producers own their books or have vesting rights?
- How much of revenue is contingent or profit-sharing commission?
- Any E&O claims, department of insurance complaints or premium trust issues?
Licences, E&O and the book after closing
Insurance producers are licensed by the state, and agencies are often licensed as entities too, with a designated responsible licensed producer. Plan for your own producer licence, the agency licence under your ownership and new carrier appointments, which carriers can take weeks to process. Ask for the agency's errors and omissions policy and claims history. Claims for advice given before closing can arrive years later, so ask your attorney and broker about tail coverage on the seller's E&O.
Ask too how the book is spread across carriers. If one carrier writes most of the premium and that carrier cancels the appointment or changes its commission schedule, a large share of revenue moves at once.
Commission statements: the independent record
Each carrier sends the agency commission statements showing policies, premiums and commission paid. These come from the carriers, not the seller, which makes them the best check on revenue. Ask for 24 to 36 months of statements from every carrier, and reconcile them with bank deposits and the agency management system. Look at policy counts, new business and lapses month by month; a book that is slowly shrinking can still show steady commission while rates rise.
Meet the account managers before closing. Clients often deal with them, not the owner.
Frequently asked questions
How do I verify an insurance agency's revenue?
Carrier commission statements and the agency management system, matched to bank deposits. They're produced by the carriers, not the seller.
Do carrier appointments transfer with the agency?
Not automatically. Carriers decide whether to appoint the buyer or continue the agency relationship after a change of ownership. Talk to key carriers early.
What are contingent commissions?
Bonuses some carriers pay based on volume, growth or loss ratios. They vary year to year and shouldn't be treated like regular renewal income.
Who owns the clients, the agency or the producers?
It depends on producer agreements. Producers with ownership of their book or weak non-solicits can leave with clients.
Can I buy a captive insurance agency?
Often not in the usual sense. In many captive arrangements the carrier owns or controls the book of business and the agent's contract, so what can be sold, and to whom, is set by the carrier. Read the agent agreement and ask the carrier directly before you negotiate with a captive agent.
How do I verify an insurance agency's commission income?
Carrier commission statements, which the carriers produce, matched to bank deposits and the agency's tax returns. The agency management system should show policies in force and premium by carrier that roughly support the commissions. Ask for contingent commission statements separately.
Sources
- SBA SOP 50 10 8.1, Appendix 15 (QoE: revenue sustainability; earnouts prohibited)
- IRS: Get transcript
- FTC Safeguards Rule, 16 CFR Part 314 (customer information security for covered financial institutions)
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy's Deal Check does not value businesses or give price opinions.