Contingency benchmarks — is the income premium or lucky?

Contingency-to-revenue is the single fastest screen for the quality of a target's contingency income, because the ratio behaves predictably with scale. A buyer who knows the band for the target's revenue size can tell at a glance whether the contingency is normal, suspiciously high, or suspiciously low — and each of those has a different diligence implication. It's the capstone of the contingency framework: after reconciling the premium base, the loss basis, and the clawback exposure, the band positioning is what says whether the resulting number is worth a premium multiple.

§ 01 · Five revenue-band benchmarksWhat's normal by size.

The five bands set the expectation: under $1M of revenue runs below 2% contingency-to-revenue, $1M–$3M runs 2%–5%, $3M–$7M runs 4%–7%, $7M–$15M runs 5%–9%, and above $15M runs 6%–12% or more. Two features of the curve matter for diligence. Below $1M is the near-zero band — most carrier thresholds are out of reach, so what contingency does appear is usually tied to one or two concentrated carrier programs. And $3M–$7M is the inflection where contingency becomes a meaningful EBITDA contributor: multiple carriers producing contingency, diversification smoothing the variance, and the income becoming a structural earnings component rather than an occasional bonus. Knowing the band tells a buyer whether a target's contingency is doing what an agency that size should do.

§ 02 · The scale mechanicWhy the ratio rises.

The benchmark works because the underlying economics are structural, not idiosyncratic. Carrier contingency programs reward volume through tiers and gates, so a larger agency naturally crosses more thresholds across more carriers and earns a higher contingency-to-revenue ratio — the curve is a feature of how carriers pay, not of any one agency's skill. That's also why band position is informative: a $2M agency earning 4% is at the top of its expected range (potentially a strength signal), while a $10M agency earning 4% is below its range (a question to investigate). The band is the lens that turns a raw contingency-to-revenue number into a read on whether the agency is over- or under-performing the structural expectation for its size — the mechanism behind the tier and gate synergies covered in tier-jumping math.

§ 03 · Above-band and below-bandWhat each position signals.

A position outside the band is a signal to investigate, and the direction tells the buyer what to look for. An above-band position has three candidate explanations: disciplined carrier selection with strong loss ratios, strategic carrier concentration that maximizes tier participation, or simply a favorable recent year with above-trend loss experience — and which one it is determines whether the contingency deserves a premium or a haircut. A below-band position has three diagnostic signals: weaker loss ratios than volume alone would predict, a diffuse carrier distribution that leaves the agency below tier thresholds, or a recent contingency miss from a specific loss event. The discriminating test is repeatability: a history that consistently runs above-band signals structural advantages that warrant a premium valuation, while an "average-average-spike-average" pattern suggests the current year is lucky and shouldn't be capitalized at a premium multiple. An unexplained band position — a seller who sits in a band but can't say why — is itself a financial-discipline red flag, because the explanation is a quality signal in its own right.

§ 04 · The five-year historyAnd the full framework.

The diligence sequence that makes the benchmark useful is short and ordered: confirm the current-year ratio against the revenue band, pull five years of history, segment by carrier, then apply the earned-premium and incurred-loss disciplines plus the clawback check. The five-year history is the consistency test — it's what separates a structurally premium book from a lucky one, and it's the difference between capitalizing contingency at a full multiple and discounting it. The benchmark itself is a screen, not a decision tool: a target sitting comfortably within its band can move through contingency diligence at standard pace, while a target outside the band triggers the additional workstreams. Together, the seven pieces of this framework — loss-ratio compatibility, tier-jumping, volume gates, earned premium, incurred losses, clawback exposure, and band positioning — are the complete contingency-DD discipline, and the band benchmark is where they resolve into a verdict on whether the income is worth what the seller is asking for it. Where the loss-ratio compatibility piece begins is in the loss-ratio trap.

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