Rethinking earn-outs in insurance M&A — why retained commission income is the metric that matters

As merger and acquisition (M&A) activity in the insurance sector continues at pace, deal structures are evolving to reflect the unique economics of broking businesses. One area where this is particularly evident is in the use of earn-outs. This is a common mechanism for bridging valuation gaps between buyers and sellers.

Our corporate lawyers advise both acquirers and sellers on structuring earn-outs that are commercially sound, legally robust and tailored to the realities of the insurance market.

A key trend we’re seeing? Moving away from traditional EBITDA-based earn-outs in favour of retained commission income (RCI) as the preferred performance metric.

Why earn-outs are so common in insurance deals

Earn-outs are especially prevalent in insurance M&A because:

• Many deals involve owner-managed brokerages, where the seller remains involved post-completion.
• Buyers want to de-risk the transaction by tying part of the consideration to future performance.
• There is often a valuation gap between what sellers believe their business is worth and what buyers are willing to pay upfront.

The problem with EBITDA in insurance broking

While EBITDA (earnings before interest, taxes, depreciation, and amortisation) is a standard metric in many sectors, it often fails to reflect the true value drivers in insurance broking. That’s because:

• EBITDA can be distorted by non-cash items, group charges, or one-off costs.
• It may not accurately capture the recurring nature of commission income.
• It can be manipulated through discretionary spending or accounting treatments.

Why retained commission income (RCI) makes more sense

RCI is essentially the net commission income retained by the brokerage after insurer payments and introducer fees. It is a more reliable and sector-specific metric. It reflects:

• The stickiness of the client book.
• The renewal rate of policies post-acquisition.
• The true revenue-generating capacity of the business.

Buyers favour RCI-based earn-outs because they align incentives and reduce the risk of overpaying if clients don’t renew. Sellers, meanwhile, can benefit from a clear, measurable target that reflects their ongoing contribution.

Key legal considerations in structuring RCI-based earn-outs

Our corporate team helps clients navigate the complexities of earn-out drafting, including:

• Defining RCI precisely in the sale and purchase agreement (SPA).
• Setting realistic thresholds and caps to avoid disputes.
• Agreeing on reporting and audit rights to ensure transparency.
• Protecting against manipulation of the earn-out metric post-completion.

We also advise on retention mechanisms, security for deferred consideration and dispute resolution clauses — all critical to a successful earn-out arrangement.

In insurance M&A, sector-specific advice matters

One size does not fit all. Earn-outs based on retained commission income offer a more accurate and fair way to structure deals, but only if they are carefully drafted and negotiated.

Our corporate team combines deep transactional experience with sector insights to help clients structure M&A deals that work in the real world.

If you’re planning an acquisition or sale in the insurance sector, get in touch with our corporate team by emailing hello@brabners.com, phoning 0333 004 4488 or filling in the contact form below.

You can also get in touch with me directly.