When one agency buys another, it is infrequent to have the assurance of audited financial statements to guarantee the accuracy of insurance agency financial statements. We “trust” the folks with whom we are transacting purchases, mergers and sales. However, as my daddy often told me, “Trust is easier with a contract than without one.” So we recommend the inclusion of a ‘Look-Back’ provision in a contract of sale that provides for the review of revenues generated and expenses used in the first year after a sale to assure that the revenues and expenses provided for the year prior to the sale were generally accurate. The section of the agreement is meant to “correct” overstated revenues caused by accounts that were accounted as income but remained unpaid and understated expenses that were undercharged in the year prior to a transaction but caused additional expenses beyond normal expectations in the year following the transaction. The Provision is rarely needed for more than one year after a transaction.

The ‘Look-Back’ provision states:

The Buyer will have the right to compare revenues by client in the 12 months subsequent to a transition against comparable revenues in the twelve months prior to the transaction to verify the accuracy of historical revenues. The Buyer will also have the right to compare expenses by General Ledger line in the same periods to assure that all expenses were accurately represented by the Seller for the year prior to the transaction. If inaccuracies are found, the Seller warrants that a pro-rata adjustment will be made to the agency’s value to offset the value of the revenue shortfall or the additional expenses and the cost of the agency will be adjusted accordingly.

The purpose of the ‘Look-Back’ provision is to amend the agency value and the cost to a buyer if ON-GOING revenues have been overstated or ON-GOING expenses understated in the year prior to a transaction. The ‘Look-Back’ provision is NOT meant to correct for policies whose renewals increased or decreased from prior year, terminated or non-renewed accounts or changes in expenses driven by the decisions and actions of the buyer.

The section above is not meant to represent acceptable legal wording for a contract. Always allow your attorney to amend the wording of the ‘Look-Back’ section to fit the legal requirements of contracts in your own state.