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What agency owners need to know before they ask a bank for acquisition money
A joint perspective from AgencyFocus and Live Oak Bank
The agencies that are experiencing rapid growth aren’t just writing what comes in the door or answering the phones anymore. The strategies that worked 10 years ago still work, but they have a max limit to how quick they can help your agency grow.
Acquisition changes the game for agencies who dip their toes in the buyers’ pool. One deal can grow you 50, 75, or 100 percent at once. That’s why so many agency owners who are already growing well are looking at purchasing other independent insurance agencies right now, and why the conversation shifts almost immediately from strategy to financing. Which brings up the part most owners have never had to learn: how a lender decides whether your deal works, and what they’ll say no to.
On a recent episode of Business Refocused, Lindsay and Carey sat down with Covington Carlson of Live Oak Bank to walk through how acquisition lending works for independent agencies. Covington brings the underwriting lens, the view from the side of the table that says yes or no. Agency Focus brings the financial and valuation lens on the agency itself. Together they cover what you need in place before you ever ask for a loan.
Understand the Difference Between Good Debt and Bad Debt
Debt has a bad reputation in this industry, and it costs owners real opportunities. The distinction that matters is not size, it’s direction.
“Bad debt is something that takes money out of your pocket, and good debt is something you can take on and still have cash flow, put money in your pocket.”
Covington Carlson, Live Oak Bank on Business Refocused Podcast
An acquisition loan is engineered to land on the good side. A lender won’t fund the deal unless the cash flow you’re buying clears the payments on the money you’re borrowing. Here’s what that looks like in practice. A first-time buyer came to Live Oak in early 2023. He knew the industry well and had an MBA, but had never owned an agency and didn’t have the liquidity for a down payment, so he found an investor to cover the 10 percent a first-time buyer needs. The deal was a $2.4 million purchase price at about 3.5x EBITDA at $680,000 of EBITDA and a small seller note for attrition protection, and it carried. The purchaser’s annual debt payments came to $355,000 against that $680,000 of cash flow.
One wasn’t enough for this buyer, they kept going. January 2024, they purchased another agency at about $480,000 of EBITDA for $2 million, structured with a $400,000 seller note and the seller staying a year to transition clients. Mid-2025, a $770,000 purchase price for around $320,000 of EBITDA. Early 2026, a fourth deal at a $980,000 purchase price with a 50 percent seller note.
Three years and six months from his first deal, he’s closed four deals and is sitting at roughly $2 million in EBITDA. When compared to organic growth, there are plenty of fourth- and fifth-generation agencies that are sitting at $2 million in revenue. Agencies that are willing to be creative about how they grow their agency can experience rapid growth that cannot be replicated organically.
Getting a Loan as an Independent Insurance Agency
Every acquisition loan runs through one calculation. Debt service coverage ratio: net operating income, minus required officer comp, divided by total annual debt.
At 1.0 you’re breaking even. This number changes with market appetite, but is important to factor in because it measures how much room the agency has to reinvest in the business or take a distribution rather than sending every new dollar of profit to the note.
At 0.8, the deal costs you more in payments than it produces in profit. Some owners can hear this as the bank blocking a good deal, but it’s the opposite. A bank will deny a loan if this happens to keep the buyer out of a hole, and a 0.8 is a lender telling you in advance what your own P&L would tell you twelve months later at a considerably higher cost.
The personal side of the file matters. Banks will look for personal financials that include:
- No bankruptcy.
- A credit score of at least 650, with above 680 preferred, and closer to 700 for conventional terms.*
- No pattern of late pays.
Notice what’s missing. There’s no useful pre-approval letter in agency lending, because the number depends on the target’s cash flow rather than yours. Owners who’ve recently bought a house expect the process to work the same way, and it doesn’t.
Know Which Loan You’re Asking For
There are multiple different types of loan structures available to independent insurance agencies. Live Oak does both conventional and SBA lending, and the right one depends on the borrower rather than the deal.
The SBA program was built to be friendly to small borrowers. You can get up to a 10-year term, no prepayment penalties, and no covenants. Once you’ve owned your business for more than a year, there are minimal down payment options available to you.
The tradeoff is collateral. If you hold more than 25 percent equity in real estate, including your primary home or rental property, the SBA requires a secondary lien behind your primary mortgage holder, and a third position if you have a HELOC. That requirement comes from the SBA, not the bank.
Conventional lending skips the lien but expects a stronger profile, because the bank carries the whole loss on a default. A $3 million conventional loan that goes bad is a $3 million hole with no government guarantee behind it. So conventional wants stronger credit and EBITDA. A buyer with $100,000 of EBITDA doing a small acquisition is usually an SBA deal. A buyer with three to five million in revenue, strong margins, and an acquisition pipeline is usually looking at conventional.
Understand What Actually Counts as Revenue
Total revenue is the easiest number on your P&L to find and the most common way buyers talk themselves into a bad price. There are a couple of items that are commonly removed as experienced buyers or banks are looking at the proforma of an agency.
First is contingency income, it isn’t promised and can change rapidly year to year. If counted as part of the total revenue at all, it needs to be reduced significantly as to not increase total deal volume when it’s not promised the next year.
Second, is Policy fees. For specific parts of the US, policy fees are very common, however, they’re typically one-time items that will never repeat. The first question a lender asks about any set of financials is what that “other income” number consists of, because true recurring revenue counts and one-time revenue gets backed out.
The next thing both AgencyFocus and Banks would look at when analyzing overall agency revenue is book composition. AgencyFocus has worked with agencies carrying heavy bond concentrations, and bonds don’t renew the way personal auto or a commercial package renews. Two agencies both doing a million dollars in revenue can be worth very different numbers depending on what type of business is being written.
Then, it’s important to know the agency’s margin, because it’s the metric most owners can’t quote and every underwriter looks at. Live Oak’s team treats 30 to 35 percent net operating margin as roughly average.
That gap decides deals. A million-dollar agency generating $600,000 of profit and a million-dollar agency generating $200,000 are not going to be purchased at the same purchase price. Two hundred thousand dollars of profit will never cash flow a $3.5 million loan, no matter what the letter of intent says.
Get the Add-Backs Right in Both Directions
Buyers doing their own due diligence can often get add-backs wrong in two ways:
Some miss add-backs that are legitimately available and talk themselves out of a workable deal. What comes back:
- Amortization, interest, and depreciation, which are automatic.
- A departing employee’s compensation, if you can document it with a W-2.
- The seller’s salary, once the seller is gone.
- Rent expense, if you aren’t retaining the lease.
The more common failure runs the other direction. Buyers can get add-back happy and inflate the number to make a price work. Underwriting will verify every add-back and rebuild the pro forma figure independently, so an overly happy add-back analysis won’t make it through the process.
Valuation sits outside all of this on purpose. Banks typically do not perform valuations in-house, and Live Oak is no exception. Once a deal is approved and moving toward closing, most lenders will order an independent third-party valuation. If the valuation lands light, you renegotiate or bridge the gap with a seller note. Sellers who weren’t told this step was coming tend to take it badly, so it’s worth naming early.
If You’re Perpetuating Internally, Get the Bank’s Math Anyway
The riskiest deals in this industry are the ones no bank ever sees. Internal sale, owner-financed note, no third-party opinion, no test of whether the next generation can carry the payments.
“If the bank will loan it, you should loan it. You are in essence becoming the bank.”
Carey Wallace, AgencyFocus
Skip that check, and there are times when the note needs to be renegotiated three years later, when the buyer discovers there’s, nothing left to reinvest. When the previous owner holds the note, this can significantly impact their retirement, as well as the agency’s future survival. There is a reason that roughly 75% of independent insurance agencies fail to successfully execute an internal perpetuation plan.
Buying 100 percent at one time is what breaks most internal deals at current multiples. Even when a parent sells at a discount, the debt load can bury the child. There’s a better structure available:
- Buy a piece to start, 20 or 30 percent, on a 10 to 15 year term with no money down.
- The seller doesn’t guarantee the note, because it’s an individual note to the buyer.
- Each subsequent slice gets easier, because underwriting looks at combined EBITDA. Own $500,000 and buy $500,000, and the bank is evaluating a million.
The owners who handle this well start early. A father and son recently came into Live Oak five years ahead of their perpetuation just to understand how the financing would work. They were further ahead than almost anyone, and are giving themselves the best chance of a smooth transition.
Where to Go From Here
You don’t need a deal in hand to start preparing. Most of this work is on your own agency, and it makes you a better buyer whenever the right opportunity shows up.
- Run your own DSCR. Net operating income, minus what you need to pull from the business to live on, divided by total annual debt. Under 1.25 means less acquisition capacity than you think.
- Split your revenue line into commission, contingency, and other income. Take 25 percent off contingency yourself, then decide honestly whether the “other” bucket recurs.
- Calculate your net operating margin and compare it to the 30 to 35 percent range. If you’re below it, go through your expenses and find out why before a lender does.
- Send a lender your financials before you have a deal. A 2025 tax return plus a current profit and loss statement and balance sheet is enough to run a cash flow analysis, and a good lender will run the numbers on deals you’re only considering.
- If perpetuation is the plan, start the conversation five years out rather than sixty days out.
“You don’t have to have everything figured out. That’s why the bank is here.”
Covington Carlson on Business Refocused Podcast
The buyer who built $2 million of EBITDA in three and a half years didn’t do it on nerve. He knew his own numbers and the seller’s well enough to tell a good deal from a bad one before underwriting told him, and that’s a skill you can build in your agency this quarter, whether you buy anything or not.
Want to know what your agency could support? AgencyFocus helps independent agency owners get their financials clean, understand what their book is actually worth, and build the structure that makes a deal work on paper before it works in a contract. Live Oak Bank brings the acquisition, real estate, working capital, and perpetuation lending to fund it. Reach out to either team to start the conversation.
Listen to the full conversation with Covington Carlson on Business Refocused
