How to Sell an Insurance Agency

The book of business

The book is the list of every client, every policy, the carrier that wrote it, the premium, the commission rate, and the renewal date. A buyer takes that list from the agency management system and tests it against the commission statements the carriers send each month. If the two do not agree, the buyer's review slows down until someone explains the gap.

Retention gets the most attention. It is the share of premium or policies that renew from one year to the next, and buyers want to see it by line of insurance, by carrier, and by producer. An agency that holds on to nearly all of its personal lines clients and loses a few commercial accounts a year looks different from one where renewals are slipping across the board. Buyers also want the tenure of clients, since a policy that has renewed for ten years is a safer bet than one written last spring at a low introductory price.

The mix of lines changes the price. Commercial insurance, with larger premiums and a service relationship, usually draws more interest than a book made up mostly of auto policies that clients shop for every renewal. Employee benefits and life insurance produce different commission patterns and different questions. A buyer looks for a book with some breadth, and for a specialty such as trucking, restaurants, contractors, or farms that the agency understands better than the market does.

Commission income and what it is made of

Buyers split revenue into new business commission, renewal commission, and contingent or bonus commission that carriers pay based on volume and loss results. Contingent income is uncertain by nature, because it depends on how the carrier measures profitability, and buyers will average it over several years and may exclude some of it. Fees charged directly to clients, such as policy fees and consulting fees, are tracked as a separate line.

Carrier concentration matters. An agency that writes most of its business with one carrier is exposed to what that carrier decides to do: change commission schedules, tighten appetite, or cancel an appointment. Buyers read the agency contracts to see commission rates, termination rights, and what happens to the renewals if the relationship ends. Some carriers pay renewals for years after termination and some do not, and the difference is large.

Founder pay, family on the payroll, and personal expenses all come under review, as they do in any sale.

Who owns the book

This is the question that surprises sellers. In an independent agency the agency generally owns its expirations, meaning the right to approach clients at renewal, and that is what a buyer is purchasing. In a captive arrangement, where the agent represents one carrier, the carrier often holds some or all of that right, and the agent may be limited in what can be sold or to whom. Your agreements with your carriers say which situation you are in, and it should be read before any marketing begins.

Rules on ownership of expirations, on what a former producer can take, and on how clients must be notified vary by state, and your attorney confirms what applies to your agency. Carrier consent is often needed to move the book, and some carriers have the right to approve the buyer or to take a first look at the business.

Producers, staff, and the owner

Producers are the people who sell, and in an agency they often hold the client relationships. A buyer will ask how much of the book each producer wrote, how they are paid, and whether they have signed agreements limiting competition and soliciting clients. A producer with a large book and no written agreement is the largest risk in the file, since the clients may follow the person and not the agency. Our post on non-compete agreements explains how those terms tend to be treated in a sale.

The account managers and customer service staff matter nearly as much. Clients call them about certificates, claims, and changes, and when a long-time service person leaves, retention often drops. Buyers meet the key staff before closing, and they pay attention to how the agency would run during the first renewal season.

If you are the main producer, plan on a transition period. Buyers want you to introduce the clients, stay involved for a time, and keep your name on the relationships until the renewals have been collected once. How long that lasts and how much you are paid for it is part of the deal terms.

What has to transfer

Producers and the agency hold licenses, and each producer must be properly licensed and appointed with the carriers before they can write business for the buyer. Agency licenses are issued to an entity, and a buyer who is not already licensed will need one. Carrier appointments are renewed or reissued under the buyer, and during the gap the commissions may stop or be paid to a different party. Plan this timeline carefully with your attorney and the buyer.

The agency management system and its data move with the sale, along with the client files, records of communications, and policy documents. Client information is sensitive, and a buyer will ask how it is stored and who can see it. Errors and omissions coverage is another item: agencies should carry it, and a buyer will want to know about past claims and whether a tail policy is needed to cover work done before closing.

The lease, equipment contracts, website, domain, phone numbers, and email accounts follow the usual path. Many agency deals are structured as asset purchases, and your attorney confirms which structure suits yours.

How the price is paid

Buyers typically pay a share of the price at closing and hold back the rest, to be released if the book retains. If a large part of the revenue leaves in the first year, the buyer pays less. That is a reasonable risk to ask a seller to share, and a seller with strong retention records can usually negotiate better terms. Our post on earnouts and holdbacks goes into how those are set.

What sinks an agency sale

The common causes are a book that is smaller than reported once it is tied to commission statements, carriers that decline to consent, a producer who leaves with a piece of the book, missing records of who owns an expiration, and a mix of business with much of it on a path to being shopped away. Sellers who wait until retention has already slipped may find the buyer pool smaller than they hoped.

Preparing the agency

Reconcile the management system to the carrier statements and keep the reconciliation. Prepare a retention report by line, carrier, and producer going back several years. Get written agreements in place with your producers. Read your carrier contracts for consent and termination terms. Clean up the client files and the licensing records. Decide how long you are willing to stay after closing. When you want to see how buyers will look at your agency, our page on selling an insurance agency is a good starting point, and Business Advisors of America can begin with a valuation built from your own book.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.