Revenue concentration risk — the silent deal threat.

You've checked the margin and the revenue trend. Then you ask the one question that turns a clean deal dangerous: where does the revenue actually come from? Concentration is the silent assassin of agency acquisitions — it survives the initial negotiation and detonates after close, when a major client leaves or a carrier rewrites its commission schedule. This piece is how to detect each form, measure it, and adjust the valuation before you sign.

§ 01 · The thresholds15% for clients, 40% for carriers.

Two numbers anchor the analysis. If a single client exceeds 15% of revenue, the valuation must be discounted for flight risk — lose that client to an acquisition, a merger, or a competitor and you lose a chunk of the economics overnight. If a single carrier exceeds 40%, the agency is betting on one platform that controls what it can sell, how much it earns, and whether the appointment survives; a carrier can cut commissions 5–10% without notice or terminate an appointment on 30–90 days' notice, taking the assigned book with it.

A book that would trade at 4.5× normalized EBITDA might trade at 3.6× with a 20% concentration discount. Beyond the discount you have two more levers: an earn-out that pays the full price only if the concentrated client stays 12 months, and a seller indemnity that compensates you if it leaves inside that window. The most disciplined buyers use all three.

§ 02 · The volatile bonusContingency income and the loss ratio.

Contingency bonuses — carrier profit-sharing based on growth and loss ratios — swing wildly with forces outside the agency's control. Owners treat them as recurring commission and budget them for debt service; then a hard market or a claims spike cuts them 50% and the agency is caught short. Pull three to five years and the volatility is plain: $150K, then $85K, then $210K, then $120K is not stable income.

§ 03 · Growth that isn't growthThe hard-market mask and the 1099 test.

An agency posts 12% revenue growth — but the carriers raised rates 15%, so the book actually shrank 3% as clients left over higher premiums. The hard market is masking attrition. Always read policy-count retention alongside revenue: if revenue is up 12% while policy count is down 3%, the growth is inflation, not organic, and the EBITDA should be adjusted down to match. In a stable market 96% retention is fine; in a hard market it should clear 98%, so the same number reads differently depending on the cycle.

Then run the truth serum. A management system can be stale, misconfigured, or massaged; carrier 1099 commission statements cannot. Total the 1099s from every carrier and compare to the revenue on the P&L. If the system shows $1,000,000 but the 1099s show $850,000, that $150,000 is phantom revenue — it either never happened or was booked wrong, and it comes off the purchase price dollar-for-dollar. Demand a complete set of 1099s for at least the trailing 12 months and have a CPA reconcile them; any variance over 2–3% triggers a deep dive.

§ 04 · Pricing the riskFrom diagnosis to offer.

Concentration is a spectrum, and stacked risks compound. Consider two agencies at the same $2M revenue: one with its largest client at 12%, top carrier at 35%, a 50% loss ratio, and growth backed by policy-count gains — no discount, trades at 4.5×. The other with its largest client at 25%, top carrier at 45%, a 68% loss ratio, and "growth" that's 80% attrition papered over by rate — multiple stacked risks, trades at 3.5–3.75×, a 15–25% discount. Same top line, very different deals.

Work it in four steps. Identify the risks — any client over 15%, any carrier over 40%, loss ratio above 60%, growth that's rate-driven. Quantify each — a 22% client is a ten-point concentration, a contingency line that ranges $50K–$250K is a volatility risk. Apply the discount — 10–20% for one threshold breach, 20–35% for several. Then structure for protection rather than taking the full cut in cash: tie the price to the concentrated client staying 12 months and contingency meeting baseline, and adjust down if either fails. Healthy benchmarks to hold against — no client over 15%, no carrier over 40%, loss ratio under 50%, contingency under 20% of revenue — tell you fast whether you're looking at a diversified book or a fragile one.

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