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Published November 17, 2021

QUESTION: I am considering the purchase of a local insurance agency. In addition to financial records, what else should I request from the owners?

ANSWER: The purchase of any business requires you thoroughly investigate all aspects of the entity in question. This is particularly important when buying a service business like an insurance agency. Outside of the physical assets, the primary value of the agency is an intangible known as goodwill. The goodwill I am referring to is its customer base.

To begin you should develop a “due diligence” checklist as follows:

• Request and verify financial data – This includes tax returns for 3 years, cash flow, balance sheets, profit & loss statements, accounts payable and aged accounts receivables. Also, any outstanding loans or debts that creditors may have a lien against.
• Inspect the physical assets – These may include the building, furniture, fixtures, equipment, computer hardware and software systems.
• Review contracts with insurance carriers – Is the agency in good standing with the companies it represents and will those companies continue the relationship under new ownership?
• Review employee contracts and independent contractor agreements – Do these include vested profit sharing, 401k plans, life & health insurance?
• Review and verify key employee information – Determine who they are and the duties they are responsible for. Is there a lot of turn-over or have they been with the company for five or more years? Will they remain under new ownership?
• Review and verify all customer information – Of particular importance, who are the key customers and what percentage of total premium volume do they constitute? Be wary if a large percentage is attributed to a few customers. Also, what is the attrition or retention rate of customers over the latest three-year period.
• Check for legal issues – Is there any ongoing or pending litigation and does the company have proper insurance in place?
• Verify the entity status – Is the business an individual, partnership, corporation or limited liability company? If a corporation or LLC, it’s better to buy just the assets. If you buy the entity, you are also assuming its liabilities and obligations.

Be prepared to sign a confidentiality agreement where you agree to use the information requested only to assess the strength of the business. Make sure the agreement lets you share the information with your lawyer and accountant.

If, in the final analysis, you decide to buy the business, try to pay for it on an earn-out basis. Offer a down payment of 20% with the balance to be paid monthly or quarterly over a period of three to five years, as a percentage of earned commissions.

While this article refers to an insurance agency acquisition, the checklist is applicable to any business. Your attorney and accountant may have additional suggestions you should consider before making a final decision.

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Gray Poehler is a volunteer with SCORE Naples. Business counseling on this and other business matters is available, without charge, from the Naples Chapter of SCORE. Call (239) 430-0081 or visit https://naples.score.org/mentors .The SCORE business office is located at 900 Goodlette Road North, in the Fifth Third branch bank building.