What’s a Due Diligence Report, and Does My Agency Need One?

Agencies face myriad challenges, from navigating complex partnerships and acquisitions to evaluating potential investments. Amid the complexities that such situations bring, due diligence reports offer clarity — but what is a due diligence report, and when is it required?

Due diligence reports detail all aspects of a business, from its financial records and overall market standing to its capital structure and book of business. They provide an in-depth understanding of who the business is and its value as an investment and help an organization and prospective buyers or partners make informed decisions.

There are many situations where a due diligence report is important, such as a business valuation, a merger or acquisition, a risk assessment, and a client and policy analysis. In this blog post, we’ll be focusing on the first two situations in relation to insurance agencies, offering insights for seasoned agency owners and fledgling startups alike.

When Is a Due Diligence Report Important?

In business valuations, mergers, and acquisitions, due diligence reports provide an estimate of the agency’s overall value. They take into consideration assets, liabilities, market position, earnings, growth prospects, and more.

Due diligence reports are important for a few key reasons:

• Agreement pertaining to value. Both the buyer and seller are able to establish what the business’s fair market value is and ensure that neither party is dissatisfied with what they give or take in the transaction.
• Data verification. The verification process ensures the information used in the valuation is reliable and accurate.
• Understanding key drivers. Due diligence provides insight into the underlying drivers for a business’s performance. This information assists in making accurate projections and assessments of future value.
• Risk assessment. Identifying potential risks and challenges that can affect the business’s value is a part of the process. It allows stakeholders to assess associated risks and make informed decisions.
• Quality of earnings. Due diligence reports help to assess the sustainability of earnings and reflect the business’s true value.
• Hidden liabilities. Due diligence uncovers hidden, forgotten, and undisclosed liabilities, which can impact valuations.

How Often Should an Insurance Agency Get a Due Diligence Report?

The frequency at which an insurance agency should obtain a due diligence report is subject to various factors, including the company’s industry, size, growth rate, regulatory environment, and specific circumstances.

One crucial factor to consider is the transactional frequency, as mergers and acquisitions (M&A) often prompt the need for a due diligence report. The frequency of M&A activities can vary significantly from one agency to another.

Additionally, an agency’s strategic growth plan plays a pivotal role in determining how often due diligence reports are necessary. Agencies with aggressive growth strategies that involve frequent M&A activities may require more frequent due diligence reports as they seek to expand their portfolio.

The size and complexity of transactions are also key determinants. Larger and more intricate transactions typically demand more extensive due diligence processes. Moreover, regulatory changes and shifts in the industry landscape can drive agencies to conduct due diligence to assess how these factors affect their value and M&A opportunities.

Even when there are no immediate plans for M&A activities, insurance agencies may incorporate due diligence into their strategic planning cycles to ensure they are well-prepared for potential opportunities.

Furthermore, due diligence can be invaluable in monitoring financial health and exploring potential solutions and partnerships, making it an essential tool for maintaining an agency’s stability.

Lastly, investor and stakeholder requirements can necessitate regular reporting through due diligence to meet their expectations and ensure transparency.

What’s in a Due Diligence Report?

Due diligence reports seek to capture a faithful representation of a business. As such, they should include information on:

• Finances, including tax returns, financial statements, relevant documents from the accounting team, loans, debts, information on any assets (anything the company owns, be it property and machinery or intellectual property), and liabilities.

• Information on vendors, third-party partners, and even customer relationships such as contract terms and any associated risks

• Details on essential employees such as contracts, compensation structures, labor-related issues, and benefits.
• Information on and explanations about any potential legal issues, lawsuits, existing contracts, licenses, and permits
• Specifically for M&As, a synergy and integration analysis can cover potential synergies, integration plans, and cost-saving opportunities
• An assessment of the market including competition, positioning, regulatory factors, market size, and growth trends.

Tailoring Due Diligence Reports for Insurance Agencies

A due diligence report’s timing, presentation, and specific contents depend greatly on the nature of the agency in question and its goals in generating the report.

An insurance agency may create a due diligence report for any number of reasons. Perhaps they wish to conduct M&A business, revisit their strategic growth plan, or even respond to regulatory changes.

Whatever the case, creating a due diligence report can be a complex process. It needs to be thorough yet precise and accurate, oftentimes with the added pressure of pleasing stakeholders, investors, and potential buyers.

As such, it’s an incredibly worthy endeavor to invest in a helping hand. INEX Capital & Growth Advisors has helped many insurance agencies create due diligence reports to help them achieve their goals, and we would be honored to help you as well.

To learn more, please call us at 603-691-3265 or visit our website.

About INEX

Founded in 2000, INEX Capital & Growth Advisors is a multi-disciplinary firm providing management consulting to the owners of insurance agencies throughout the United States. Our senior principals have participated in more than 500 perpetuation, merger, or acquisition transactions over the past two decades.

We are thought leaders and agency experts in several initiatives — from providing agency succession plans to valuation services to assisting with strategic planning and mergers and acquisitions, financial structure optimization, revenue maximization, and others to help agency owners seize opportunities that will bring current and future rewards. We also provide support in areas such as staff development and operational improvements.

The consulting arm of our company works with the management of insurance agencies and provides expert witness services and insurance coverage analysis in various insurance litigation cases.

To learn more, call us at 603-665-6000 or visit our website.