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. Our how to value a P&C insurance agency guide covers the full normalization math. If they're paying themselves $80,000 and running personal expenses through the business, the actual earnings are lower than they appear. MarshBerry's valuation guidance identifies owner compensation normalization as one of the most common and highest-impact adjustments in agency valuations.
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. See why retention rate is the only number that matters when buying an agency for why even small retention gaps destroy enterprise value. 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. Per MarshBerry, single-client exposure above 5-10 percent is a common valuation discount factor. Assess the stability of any concentrated relationships and price the 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. Agents who've been through acquisitions report that carrier reps can be surprisingly candid with prospective new owners about the agency's standing.
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. MarshBerry's M&A benchmarks indicate that retention below 85 percent is the most common reason deals are repriced or terminated during the due diligence phase. OPTIS Partners' transaction data similarly flags retention deterioration and concentration risk as the top two deal-killers in agency acquisitions.
Due diligence takes time and costs money — attorneys, accountants, and your own hours poring over spreadsheets. It's one of the most important investments in the entire acquisition process. Once you clear diligence, move straight to financing structure planning so the capital stack is ready when you sign.
This post is informational only. Consult a CPA, an M&A attorney, and a professional valuator before making any acquisition decisions.
Frequently Asked Questions
Q: What should I look for in due diligence when buying an agency?
A: Start with three to five years of tax returns (not internal P&Ls), carrier-reported retention, loss ratios by line, a top-25 customer concentration report, full carrier appointment and commission transferability confirmation, employment and non-compete review, and a five-year E&O claims history. If the seller resists any of these, treat it as a signal.
Q: How do I verify the seller's retention numbers?
A: Demand carrier-reported data directly from the carriers, not the seller's internal tracking, for at least three years. Seller-reported retention routinely counts rewrites as "retained" and excludes carrier-initiated non-renewals. See why retention rate is the only number that matters for the math on why that gap destroys value.
Q: Do non-competes transfer with staff when I buy?
A: It depends on state law and the contract language. Some non-competes explicitly bind successors; others require new agreements with the buyer entity. Review every employment agreement and non-compete individually with an M&A attorney before signing — staff defections without enforceable non-competes are a retention nightmare.
Q: Do carrier contracts move with the book?
A: Not automatically. Every carrier has its own appointment transfer process, and some reset commission schedules for new agents. Call carrier field reps during diligence — they're often candid with prospective new owners about the agency's standing and transfer requirements.
Q: Can I back out of an agency purchase after the LOI is signed?
A: Yes, if your LOI includes due-diligence contingencies — retention verification, carrier transfer confirmation, and satisfactory financial review. A properly drafted LOI is not a binding purchase agreement; it's a framework that lets you exit if material issues surface during diligence.