A lower-middle-market insurance agency or brokerage is usually bought with a senior cash-flow term loan, very often with a delayed-draw facility for further acquisitions, or a unitranche loan from a private credit fund, with sponsor equity, rollover and an earnout beneath. Lenders start with who owns the renewal rights, then credit renewal commissions most, new-business commissions less and contingent commissions least. They test retention by line, carrier and client concentration, producer agreements and non-solicits, and licenses and carrier appointments.
- Usual structure
- Senior term loan with delayed-draw, or unitranche; equity, rollover and earnouts beneath
- What lenders credit most
- Renewal commissions on a book the agency owns
- What lenders discount
- Contingent, profit-sharing and bonus commissions
- Retention-based pricing
- Earnouts are common, subordinated to the senior lender
- Not the agency's money
- Premium trust balances collected for carriers
First question: who owns the book?
Everything a lender does with an agency depends on whether the agency owns its expirations, the right to renew and remarket its clients' policies. An independent agency or broker placing business with many carriers generally does. An agent in a captive or exclusive program generally does not: the carrier usually owns the renewal rights, and what the agent sells is its economic interest, subject to the carrier's approval.
| What is being bought | Who owns the renewals | How lenders approach it |
|---|---|---|
| Independent agency or brokerage, whole business | The agency | The core case: a cash-flow loan against a book the buyer will own |
| A book bought by an existing agency or platform | The buyer, once the book is assigned | Underwritten on the combined cash flow, often funded from a delayed-draw facility |
| Captive or exclusive agency | Usually the carrier | Few lenders will do it; the agent agreement decides what there is to finance |
| Agency with a large benefits or specialty book | The agency, if appointments and contracts allow | Concentration and producer dependence get closer scrutiny |
Insurance distribution is one of the most active acquisition markets in the lower middle market, with private equity-backed platforms and strategic brokers buying agencies continually. That has produced lenders that know the business well and structures built for serial acquirers. A company this size has usually outgrown SBA financing, whose 7(a) loans go up to $5 million.
How lenders read commission revenue
An agency's P&L shows one revenue line that is really several. Lenders rebuild it from carrier commission statements and the agency management system, by carrier and by line of business.
| Revenue type | How it behaves | How lenders treat it |
|---|---|---|
| Renewal commissions | Recur as long as clients renew and the carrier keeps paying the same rate | The heart of the loan; credited in full once retention is shown |
| New-business commissions | Depend on producers selling; often a higher first-year rate | Credited, but lenders ask who produces it and whether they are staying |
| Contingent, profit-sharing and bonus commissions | Paid on loss ratios, growth or volume; can vanish in a bad claims year | Often averaged over several years or excluded |
| Client fees | Service or consulting fees charged to clients, where permitted | Credited if consistent and documented |
| Producer compensation | A cost that moves with revenue | Deducted; splits read against the producer agreements |
Retention is the number lenders care about most: of the premium and commission in force a year ago, how much is still on the books. They look at it by line, because personal lines, commercial lines and benefits behave differently, and by acquired book, because retention after past acquisitions predicts the next one. They also look at carrier concentration, since a carrier that cuts commission rates or leaves a state takes revenue with it, and client concentration, since a handful of large commercial accounts can make a book riskier than its size suggests; see customer concentration.
Where an agency collects premiums on the carrier's behalf, that money is held in trust and belongs to the carriers. Lenders do not count premium trust balances as the agency's cash, and buyers should keep them out of the price and the working capital peg.
Sizing the debt
Lenders start from the financial statements, add back documented owner and one-off costs (see add-backs), then make agency-specific changes: they deduct market compensation for the principals and producers who will stay, and strip or average contingent commissions. In plain numbers:
| Line | Amount |
|---|---|
| Agency earnings before owner pay | 500 |
| Less: contingent commissions included in that year | (50) |
| Less: market pay for the principal who will run the agency | (150) |
| Cash flow available for debt service | 300 |
| Annual debt service | 240 |
| Coverage | 1.25x |
Conventional bank lenders commonly look for debt service coverage of at least 1.25x. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA, and unitranche lenders stretch further; where an agency falls depends on its retention record, size and diversification. For platforms, lenders usually credit acquired agencies' EBITDA on a pro forma basis once they close, with limits on projected savings; see lending on run-rate EBITDA.
Licenses, appointments, producers and what transfers
- Licenses. The buying entity and its principals need the state producer and agency licenses for the lines the agency writes. An unlicensed owner cannot legally receive the commissions that repay the loan.
- Carrier appointments. In an asset purchase the buyer's agency needs its own contracts with the carriers, and a carrier can decline or appoint on different terms. Lenders want to know which carriers carry most of the revenue and whether they will appoint the buyer.
- Stock or asset purchase. Buying the agency's stock keeps its contracts and appointments in place, but carrier agreements often require consent on a change of control, and the buyer takes on the entity's errors-and-omissions history. See asset vs stock purchases and change-of-control consents.
- Producers and account managers. They hold the relationships. Lenders read producer agreements for account-ownership terms and non-solicitation protection, and look for retention arrangements and rollover equity for the largest producers.
- Data. The agency management system holds policies, renewal dates and client history, and must move with the business.
A buyer who cannot say who will keep the clients has not answered the lender's first question. Producers staying under agreements usually are the answer.
Structuring the purchase
| Layer | Role in an agency acquisition | Watch for |
|---|---|---|
| Senior term loan | Funds the platform purchase against recurring commissions | A leverage covenant and a coverage covenant |
| Delayed-draw term loan | Funds agencies and books bought after closing | Conditions to draw, pro forma leverage, credit for acquired EBITDA |
| Unitranche | One loan from a private credit fund, often larger | A higher blended rate and call protection |
| Revolver | Modest working capital; agencies carry little inventory | Sized to timing of commission receipts, not trust balances |
| Earnout | Ties part of the price to retention or growth | Subordinated to the senior lender and paid only within covenants |
| Rollover equity and seller notes | Keep sellers and producers invested | Subordination and put rights |
Agency deals are often priced with a retention adjustment: part of the price paid, or clawed back, depending on how much of the book renews. Conventional lenders accept earnouts and holdbacks provided they sit behind the senior debt; see earnouts and acquisition debt and escrows and holdbacks. Because there is little hard collateral, the price is mostly goodwill, and lenders often require key-person life insurance on principals who hold large books. Serial buyers should read financing add-on acquisitions and delayed-draw term loans.
The file a lender needs
For the term loan, lenders start with the P&L, the balance sheet and the debt schedule, with a year-to-date P&L through the last month-end and an AP aging where available. The acquisition adds the target's latest full year of figures for every company being bought, never an older year, and the letter of intent. For an agency, add:
- Commission statements by carrier, and a book-of-business report by line: policies, premium, commission and renewal dates.
- Retention history by line of business, and by acquired book for a platform.
- Contingent and bonus commission history, year by year.
- Carrier agreements and appointments; for a captive agency, the agent agreement.
- Producer and account-manager agreements, including account-ownership and non-solicitation terms.
- Errors-and-omissions claims history, and licenses for the buying entity and principals.
Senior bankers run every Midas Partners engagement. Once the documents are in, Midas Partners builds the financing model, lender presentation, blind teaser and underwriting memo in a day; by hand the same package takes at least a week. The model separates renewal, new-business and contingent revenue so a lender sees at once what it is lending against. Software does the analyst work and a senior banker checks every page. Of the 1,800+ lenders in the book, 1,148 write term and private credit. See the package and how we underwrite.
Common questions
- Can I finance the purchase of a captive agency?
- Sometimes, but few lenders will, because in most captive programs the carrier owns the renewal rights. The carrier's agent agreement decides what the buyer actually acquires, and the carrier must approve the buyer.
- Can the price depend on how many clients renew?
- Yes, with conventional acquisition debt. Retention earnouts and holdbacks are common in agency deals. The senior lender will require them to sit behind its loan and be paid only while covenants are met.
- Do lenders count contingent commissions?
- Cautiously. Because they depend on carrier loss ratios and volume targets, lenders commonly average them over several years or leave them out of the cash flow the debt is sized on.
- Can a platform finance future agency purchases at closing?
- Usually, through a delayed-draw term loan agreed with the acquisition debt. Each draw typically has to meet a pro forma leverage test using the acquired agency's own figures.
- Do premium trust balances count as working capital?
- No. Premiums collected for carriers belong to the carriers. Lenders exclude them from cash, working capital and any borrowing base.