United States:
Agency Acquisition Due Diligence Checklist
13 September 2010
Morris, Manning & Martin, LLP
To print this article, all you need is to be registered or login on Mondaq.com.
Insurance agency mergers and acquisitions are expected to
increase as the economy continues to improve and the continuation
of the soft insurance market limits internal and organic insurance
agency growth. In addition, the threat of an increase in the
capital gains rate will provide further incentive to owners of
agencies to sell and lock in profits at a more favorable tax
rate.
With the expected increase in agency merger and acquisition
activity in mind, we have prepared a condensed diligence check list
for the acquisition of an agency. The checklist is intended only to
spur thought and discussion of some the considerations necessary
when acquiring an agency. It is by no means an exhaustive listing
of all things that must be considered and reviewed before acquiring
an agency. If a purchaser is interested only in purchasing certain
assets from an agency, then the diligence process can be
streamlined since the purchaser will not also be acquiring the
agency's liabilities. Hence, the diligence questions focused on
liabilities in the checklist may have limited applicability in an
asset purchase.
The checklist also may be helpful for owners considering selling
an agency as an example of the types of information potential
purchasers likely will want to review. Having this information well
organized once a seller decides to entertain offers will make the
sales process progress much more smoothly.
Agency Acquisition Due Diligence Checklist
Category
|
Action Item
|
General Business
|
- Identify clients including annual fee and commission volume,
lines of business and number of years as a client
- Identify all strategic alliances and partnerships with other
companies including agreements, contracts and associated client
service and pricing detail
- Provide minute books relating to meetings of the shareholders,
board of directors and other board committees during the preceding
ten years
- Provide the stock certificate book and stock register
- Prepare a chart and list of all entities the company owns, a
list of all company locations including entire address and indicate
whether leased, owned or sublet
|
Financial
Statement
Review
|
- Provide annual financial statements for the last three years
and all auditor reports to management during such period
- Prepare capital expenditure plans including current budget and
revisions to date along with any cash flow and liquidity analysis,
sources of funding, if any, and their allocation to
expenditures
- Calculate working capital requirements to support business
plan
- Prepare interim financial statements since most recent year
end
- Provide access to general ledger trial balance
- Provide access to ledger for premium and fiduciary accounts
including reconciliation demonstrating that fiduciary account
assets equal or exceed the fiduciary account liabilities
- Provide the most recent aging schedule for accounts receivable
with comments regarding the collectability of any balance over 90
days old
- Provide a summary of all insurance contracts in place including
workers' compensation and E&O coverages
- Provide copies of all auditor reports to management and any
management responses during the preceding five years
|
Legal
|
- Compile current copies of articles of incorporation and
bylaws
- Compile current copies of any shareholder and/or voting
agreements
- List all officers and directors, agency's subsidiaries and
affiliates including the number of shares of stock held by
each
- List all stockholders
- Gather copies of good standing certificates for all
jurisdictions in which the company operates and is qualified to do
business
- Provide copies of any contracts or agreements which would or
might contain a change of control clause which would be triggered
by the proposed acquisition
- Provide a list of intellectual property owned or licensed
|
Litigation
and
Regulatory
Complaints
|
- Include a complete list of all litigation pending or threatened
at any time over the past ten years including, but not limited to,
arbitration proceedings and include as to each matter a full
statement regarding the background of the dispute and its
resolution
- Gather all files related to correspondence with regulators
during the preceding five years involving complaints to the
regulators or any allegation of impropriety
|
Permits and Licenses
|
- List states in which the agency or any of its directors,
officers or employees holds an insurance license pursuant to which
the company does business and include in the list whether the
license is held on a resident or non-resident status and the
license number
|
Information Technology
|
- Provide overview of the following systems:
-
- Agency management system
- Rating system
- Document management system
- Primary email system
- Primary network operating system
- Website hosting company and platform
- All other purchased or developed applications
- Include copies of vendor agreements and licensing
agreements
|
Taxes
|
- Include copies of federal, state and local tax returns for the
last five years
- Provide copies of all payroll tax returns for the last three
years
- Provide back-up of computation of current deferred income tax
amounts
|
Insurance
|
- Provide a complete schedule of insurance covering the agency
including type of insurance, limit of insurance, deductibles and
retentions, policy term and premium
- List all losses and claims under insurance policies for the
past five years
|
Human Resources
|
- Prepare a detailed organizational chart listing all supervisory
or professional employees
- List all employees showing full name, date hired, present
salary and job title or category, employment status (full time,
part-time, temporary, on leave) and details of any restrictive
covenants and next salary review date
- Provide example of employment contracts
- Provide example of independent contractor agreements
|
Employee Benefits / Compensation
|
- Provide summary of plan descriptions of all ERISA benefit
plans
- Provide audited financial statement of plan assets for previous
two years
- Provide most recent IRS Form 5500 filing
- Provide copies of documents related to health insurance,
flexible spending accounts, short and long-term disability
insurance and life and accidental death and dismemberment
insurance
|
Executive Compensation
|
- Provide detailed information on executive compensation
including base salary, most recent bonus, history of all stock
options, copies of any in force employment agreements or previously
terminated employment agreements that still have active
covenants
- Provide employee handbook
- Provide the annual incentive plan and long-term incentive plan
documents (if any)
|
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
POPULAR ARTICLES ON: Insurance from United States