Financial ratios — the six benchmark bands.

The seller hands you a profit-and-loss statement and says "here's what we earn." Profitability in isolation is close to meaningless. A $2.5 million book with a 22% margin and one with a 25% margin look identical until you calculate the ratios — then one reads as operationally lean and the other as carrying redundancy you'll have to cut. Ratios are shorthand that let you compare agencies of different sizes on one scale, and they expose the habits raw numbers hide: overstaffing, weak collections, an over-reliance the P&L never names.

§ 01 · The six that matterWhat each one reads.

Each ratio answers a specific question, and each has a band where healthy agencies cluster.

A few carry more weight than the rest. The margin is the headline, but a number above 45% is a warning, not a trophy — it usually means the owner stopped investing in staff and service, and the book will churn once you inherit it. The trust ratio is the only binary one: it is a solvency test, not a prosperity metric, and below 1.0 the agency has been spending carrier money, which terminates the deal. Days sales outstanding is the quiet cash-flow tell — a 70-day figure means you'll finance the client base out of pocket for months after close.

§ 02 · Reading the variancesGreen, yellow, red.

Not every miss is a deal problem, but every miss needs an explanation.

Calculate from clean source data, not the summary. The margin and comp ratio come off the P&L and payroll register; revenue per employee needs an honest full-time-equivalent count (part-timers at half); the trust ratio, days outstanding, and bad debt come off the balance sheet, the aged A/R report, and the management-system ledger. If the seller can't produce clean data in those categories, that itself is a red flag — don't compute ratios on incomplete information.

§ 03 · A worked readWhere the risk actually sits.

Take a $2.5 million agency: $550,000 of adjusted EBITDA, $1.3 million of payroll across ten full-time staff, $280,000 of trust cash against $320,000 of carrier payables plus $160,000 of receivables, and $65,000 of bad-debt write-offs. Run the six. Margin: 22% — green. Comp ratio: 52% — green. Trust ratio: ($280K + $160K) ÷ $320K = 1.38 — green. Days outstanding: 23 — green. Bad debt: 2.6% — green. But revenue per employee lands at $250,000 — yellow.

Five greens and one yellow is not a slam dunk; it's a map. The elevated productivity figure means either strong producers or a team running too lean, so the diligence writes itself: review turnover history, interview the key producers about their plans, model a 10% year-one revenue decline for transition churn, and budget one additional support hire to bring the ratio back to earth. Then price it. If the seller wants 4.5× on $550,000 of EBITDA — about $2.475 million — counter near 4.0× ($2.2 million) for the staffing risk, or tie an earn-out to retaining the top two producers. The agency is fundable and acquirable; the ratios told you exactly where the fragility lives.

§ 04 · What ratios don't tell youThe risks that live off the spreadsheet.

Ratios measure efficiency, profitability, and solvency. They are silent on risk, and three risks can sink a green-light deal. Client concentration: a healthy margin with 35% of revenue from one client or 50% from one carrier is fragile — lose the relationship and the agency follows. Retention: great collection metrics mean little if the top producer is 68 and eyeing retirement, or the lead account manager just gave notice; that's a conversation, not a calculation. And appointment transferability: if the book hinges on a carrier appointment held personally by the departing owner and it won't transfer, the value collapses regardless of how clean the numbers looked.

So run the six ratios first — they tell you fast whether the business is efficient and solvent, and they catch a number that's been engineered. Then layer the qualitative read on top. The ratios narrow the field and locate the risk; the interviews and the concentration analysis tell you whether the risk is survivable. Together they turn a seller's headline into an offer you can defend.

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