Too many agency acquisitions fail because one or both partiesdon't do enough–or the right kind of–due diligence. Before takingthe dangerous plunge to acquire another insurance agency–or beacquired–get ready for some deep digging to find out everything youcan about your potential partner.

If you don't, you could end up with financial headaches,strained relationships with carriers, personality issues and otherproblems that can quickly short-circuit your goals. And you'll wishthe deal was never made.

Sometimes both parties' excitement over making a deal that couldbring in much-needed cash and propel the agency to unprecedentedgrowth clouds their judgment.

The most common reason for failure is inadequate cash flow,blamed for 70 percent of unsuccessful acquisitions. Some ownersunderestimate the cost of not only buying another agency but ofdoing business in a now larger agency.

Often, the new owner does not adequately plan for theunexpected, or may have overestimated their ability to lower theoverhead at the new location and increase sales. Or, employees maysuddenly depart the agency, leaving the new owner in a bind.

For any acquisition to succeed, buyers and sellers must do theirhomework assignments–thoroughly.

If you're buying another agency, you've got a lot to lose if youdon't do proper due diligence, especially with a cash buyout.

Below are some of the critical steps buyers should take.

o Determine the reason for the sale:

Step one is to figure out why the target agency wants to sell.There are many legitimate reasons for selling, such as retirementor succession planning. But be careful that the seller doesn't haveany skeletons in the closet that could hurt your business down theroad.

Few agencies will volunteer every bit of information about theirbusiness–especially the negative aspects. Contact carriers thathave been used in the past; read local insurance publications andthe state insurance department Web site; contact the local BetterBusiness Bureau; and conduct Internet searches–all of which couldreveal evidence of illegal activity.

o Review the noncompete contract:

Ensure that a strong, protective noncompete contract is in placeand will be followed not only by the seller but by the agency'sproducers.

Often, when an agency is about to be sold, many of its producersview the imminent transaction as a threat to their livelihood, notknowing what change will bring. A few of the less ethical ones mayuse this uncertainty to justify shifting accounts to their ownprivate businesses or to another agency promising a more favorablecommission split.

The answer: Only consider buying agencies with ironcladnoncompete contracts.

o Analyze the book of business:

Don't just look at total commissions from the past few years.See what percentage of the accounts have been on the books for twoyears, five years, and even for 10 years.

Structure an earn-out provision to ensure the seller's book ofbusiness is as represented. Plus, review the agency's loss ratios,carrier persistency, carrier contracts and types of accounts andanticipate their likelihood of continuing as clients.

For example, the typical general contractor may not be as stableas the typical accounting firm.

Be diligent in looking for trends in commissions. For example,if total commissions have doubled in the past three months, or ifthe agency just landed a huge new commercial contract that nowrepresents a disproportionate share of commissions, something mightbe up–and you need to investigate.

Review the average commission per account and determine themean, the median and other pertinent statistics.

While you can't predict the longevity of every account, thedeeper your analysis, the better you'll be able to spotnuances–like bad policies or categories of clients that aren'tlikely to remain on the books for long.

o Review tax returns:

Look at the seller's tax returns to see if they match up withthe commission statements. This is a good, independent check onwhat the seller is representing. Plus, examine ratios, margins andnon-operating expenses.

o Analyze carrier activity:

Identify which insurance companies the agency is placing most ofits business with. See if these carriers plan to lower commissionrates, give less favorable terms with contingent contracts, changeproduct offerings, or even move out of your state. Talk to thecarrier representatives for this information.

Also, find out if the carriers' direct writers have been trying,and possibly succeeding, to encroach on the agency's business. Makesure you keep copies of all the agency's contracts with carriers.The more you know upfront, the better off you will be.

On the other side of the deal, although the buyer may have moreat stake financially, the agency being acquired can have its plansof cash infusion, growth, continuity of management and other goalssquashed in a hurry. So if you plan to sell your agency, here arethe key steps to take:

o Evaluate the buyer's financial stability:

Demand full disclosure of financials and how the money will beraised, including the lending source and how the transaction willbe closed. Be sure there's proof of funds to support the buyer'sability to pay.

Ask to see the term sheets of the buyer's loan documents, andmake sure a commitment letter is signed so the deal will go throughwith no surprises.

o Determine if the buyer's goals are aligned with yourgoals:

Reexamine your goals for selling and see if the buyer can meetthem.

For example, if you're counting on the buyer's capital toupgrade technology, hire more support staff or fund a new marketingcampaign, be sure the buyer is willing to invest in the agency'sfuture.

o Clarify management structure:

As an agency principal accustomed to your own management style,you need to be comfortable with the buyer's way of running theshop. This is important for you and for your employees, who foryears have worked under you.

Rick Dennen is founder, president and chief executiveofficer of the Indianapolis-based Oak Street Funding, which offerscommission-based lending to insurance agents. Go to www.oakstreetfunding.com formore information, or call Mr. Dennen at 866-625-3863.