businessman working on risk management, business concept

Internal and external economic factors contribute to the health of most organizations. Other elements playing a major role in the insurance market include commerce risks. When you consider all of the possible components affecting the well-being of an insurance agency – it still comes down to profit.

Look at the last three years’ business statements; balance sheets, income statements, cash flow statement, and the tax returns. Each of the documents tells the story of how the agency manages its business financially. They also reveal problems the company has faced over the past year.

Start with the income statements and taxes – the gross sales and the agency’s net earnings.  Was the increase in sales growth due to an increase in sales volume or higher priced products?  Were there changes in product demand volumes, did the agency expand services or product types or was it a market cycle?

Now take a step back and do your due diligence. Ask yourself, what were the variances between the past three years and what caused the shifts?  You’re looking for market comparisons, competitive challenges, and the market segment share.

Historical Performance

Past years’ performance and financial reports are the best tools for gauging the health of an insurance agency.  The information provides itemized insight of the business and helps to determine if the future projections are possible.

What’s the agency’s book value (fair market value) and how likely are you to reach your future forecasts?  The agency’s book value contains a client list, files, and prospect relationships. These are considered assets linked to generating future sales.  Keep in mind, a certain percent of these assets are not guarantees of business.

Overall the agency’s health is substantiated by the income and market performance.  Check out the office and personnel – a good working environment is essential to an organization’s health. The formula for building a solid trade reputation is comprised without the retention of agency personnel, up-to-date technology, and a developed marketing culture.

Risks Factors

Every business has some risk. How you manage the uncertainty makes the difference between prosperity and constant struggle. Cash flow is without doubt, a significant aggravate affecting the agency’s growth and net worth – in most cases, there’s a solution.

One area of risk is uncollected receivables. It will stunt the growth and generate the need for costly funding that cuts into the profit margins. Financial reports should convey indicators of turnover rates, credit policies and terms of aging receivables. If the agency finds itself short of cash – traditionally, it means the agency’s money is tied up in receivables and inventory.

Working Capital

Working capital is the amount of available cash to operate the agency and meet the day-to-day business obligations. Professionally, the term refers to current assets minus current liabilities. Sufficient capital keeps the doors open and the business flowing. How much working capital does a company need on its balance sheet?

Using this formula, a healthy company with a positive working capital can pay off its current liabilities and still have remaining current assets. A prospective agency for purchase has a constant rate at all sales levels over the past three years.

Earnings & Net Worth

The company’s ratios of gross profit to net sales provide a good comparison of the agency’s health in the market segment.  The proportion of net income to net worth gives you an idea of the return on investment. Make sure the profit calculations are reported before and after taxes. Next, look at the agency’s expenses as they are now – you already know these can change under new management.

Buying an insurance agency involves a lot of review and analysis. Take the time to look at the infrastructure and its financial health – the more diligent you are, the more likely you are to see a profit.


Determining the agency’s business profitability is critical. Many times, owners place an emotional value on the business – let’s face it – you can’t bank emotion or use it for collateral.  Stick to the old fashion method of profit principles. Work with a professional on this purchase – they know the industry and the agency’s position in the current market.