Agency growth almost always involves risk. Whether you are buying another agency, hiring a producer, merging with a peer, or transitioning ownership internally, the decisions you make today can shape your agency’s future for decades.
In a recent conversation, IA Valuations’ Jeff Smith, CEO, and Jarod Steed, Business Planning & Valuations Analyst, sat down to unpack one of the most misunderstood, yet most critical, steps in any ownership transition: due diligence. Their message was clear from the start. Due diligence is not about unnecessarily slowing deals down. It is about protecting value, aligning expectations, and avoiding surprises that can derail even the most promising opportunities.
As Smith put it early in the conversation, “It’s intentionally slowing down a major business decision to verify facts, identify risks, and fully understand what you’re committing to, before you legally commit to it.”
Due Diligence Starts Earlier Than You Think
Many agency owners think due diligence begins once documents are exchanged or lawyers get involved. In reality, it starts much earlier, often with the first conversation.
This early stage is informal, but it’s just as important to the process. These are the exploratory discussions over coffee or lunch, and the early excitement when both sides see potential. “You may not call it due diligence,” Smith noted, “but you’re already doing it.”
Steed added an important nuance: excitement can easily create blind spots. “This isn’t a flashy part of a transaction,” he said. “You need to go in with the expectation that this will feel tedious at times, but that’s because it matters.”
At this stage, the goal is not to validate a deal at all costs. It is to ask honest questions, set expectations, and adopt what IA Valuations refers to as the trust‑but‑verify mindset.
Two Phases, One Purpose
IA Valuations breaks due diligence into two distinct phases. The first is opportunity identification, recognizing that something might work. The second is where discipline matters most: objective validation.
“That second phase is where you really step back,” Smith explained. “You eliminate preconceived opinions and ask questions like, ‘What are the risks I might be overlooking?’”
This distinction is critical. Too often, agency owners charge ahead once momentum builds, only to realize later that cultural misalignment, financial inconsistencies, or operational gaps were hiding beneath the surface.
Steed framed it well. “You shouldn’t go into due diligence thinking yes or no,” he said. “You should go in thinking, ‘How much should I be willing to invest, and why?’”
The outcome is not binary. It is a spectrum, and due diligence helps you understand where on that spectrum a transaction truly belongs.
People First: Employees and Culture Drive Value
While financials often dominate acquisition conversations, IA Valuations believes strongly on a key tenet: agencies are built on people.
Steed described employee and HR review as the most overlooked, and most impactful, area of due diligence. Compensation, benefits, roles, tenure, and expectations all influence retention, morale, and long‑term performance.
“You need a complete picture,” Steed said. “Not just salaries, but benefits, experience levels, and how the team actually functions day to day.”
Smith reinforced the point with a warning that resonates across the industry. “What happens if you lose a thirty‑year CSR because benefits change? That risk can be more damaging than a weak financial year.”
Culture, meanwhile, is even harder to quantify, but no less important. Steed encouraged agency owners to ask direct questions about mission, vision, values, and long‑term plans. Even informal answers to these questions can reveal sophistication and alignment.
Steed shared an analogy that stuck. Culture does not always come with glossy materials. “Sometimes the agency without the shiny brochure is actually the stronger fit,” he said. Alignment, not polish, often predicts success.
Financial Due Diligence: Where Confidence is Built
When the conversation shifted to financials, Steed emphasized clarity and normalization. Profit and loss statements, tax returns, and balance sheets all tell part of the story, but only when reviewed together.
“The tax return is where the rubber meets the road,” Steed said. “That’s where everything gets cleaned up.”
One recurring theme with these conversations is owner compensation. Smith notes that many agencies appear less profitable on paper than they truly are, simply because compensation is not aligned with market norms. “If a buyer is targeting a 27% to 30% profit margin, that gap almost always comes from owner compensation.” Understanding this early helps both buyers and sellers set realistic expectations, not just about price, but about sustainability.
Carrier Data and the Source of Truth
Beyond financial statements, carrier production reports play a crucial role in validating performance. Steed described these reports as the most reliable insight into a book of business.
“This is your source of truth,” he said. Loss ratios, retention trends, and new business flow all help confirm whether the agency’s story aligns with reality.
Agency management system reports still matter, but only as a complement. As the IA Valuations team puts it, “Junk in is junk out.” Confidence in data quality dictates how much weight those reports deserve.
Legal Structure and Risk Protection
Legal diligence is less glamorous, but non‑negotiable. Jeff emphasized that ownership documents, employment agreements, and restrictive covenants should be reviewed carefully, and often updated, before a deal moves forward.
“We haven’t seen a buyer willing to proceed without employment agreements in place,” Jeff said. “Especially for producers.”
These agreements protect not only the buyer, but the value of the transaction itself. Loose ends here can unravel years of planning.
Applying Diligence Across Every Scenario
One of the most important takeaways from the conversation was that due diligence is not limited to acquisitions. Internal perpetuations, mergers, and producer hires can all carry unique risks.
In internal perpetuations, familiarity can breed overconfidence. Steed used an iceberg analogy to explain it. “Most people only see the top,” he said. “Ownership forces you to understand what’s underneath.”
Mergers, meanwhile, demand time, especially when it comes to culture. Smith offered blunt advice. “Write expectations down, then spend time “dating” before you merge.”
Even producer hires deserve elevated scrutiny. Successful producers eventually expect ownership opportunities and failing to plan for that can create conflict down the road.
One Final Thought: Curiosity is the Skill that Matters Most
As the conversation wrapped up, Smith circled back to a theme that ran through every topic: objective curiosity. “If you’ve already made up your mind,” he cautioned, “due diligence becomes fake.”
The most successful agency owners use due diligence not to justify decisions, but to challenge them. They look for reasons a deal could fail, knowing that doing so strengthens the final outcome.
In the end, due diligence is not about slowing growth. It is about earning confidence in your numbers, your people, and your future. And as Steed summed it up, “You’re not just buying an asset. You’re deciding how much risk you’re willing to own.”
By: Colleen Elliott
Colleen Elliott is the Marketing Coordinator on the IA Valuations team. A graduate of The Ohio State University’s Fisher College of Business, she has a background in sales, marketing, and communication. Colleen manages marketing campaigns, communications with agents and state partners, and helps the IA Valuations team from an operational perspective.
This article is based on a conversation between the IA Valuations team on our live webinar, How to Perform Agency Acquisition Due Diligence. You can watch that webinar recording, and access our whole library of content, here.
About IA Valuations and Agency Link – Founded in 2017, the IA Valuations team has performed over 400 valuations to independent insurance agencies across the U.S. Our advisors have 30+ years of experience guiding agency owners on maximizing their agency value, planning, and legal needs for ownership transition. In addition, IA Valuations has provided perpetuation planning, financial modeling and business planning for independent insurance agencies. Finally, IA Valuations has advised dozens of agency owners on selling their agencies through our Agency Link process. Agency Link is a platform that connects buyers and sellers together to further the growth and strength of the IA system. To learn more about IA Valuations, please visit IAValuations.com or contact@iavaluations.com.
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