Most business owners who have a buy-sell agreement got there by doing the hard part. They had the awkward conversation, paid an attorney, and signed something. It sits in a file and everyone feels better.
The question worth asking is whether there is any money behind it.
Two Problems That Get Confused
Key-person insurance and buy-sell funding get treated as the same purchase. They are not, and a business can genuinely need both.
Key-person coverage answers: what happens to the company’s revenue and stability if someone essential is suddenly gone? The money goes to the business, to keep it running while it absorbs the loss.
Buy-sell funding answers a different question: where does the cash come from to purchase a departing owner’s share? That money ends up with the departing owner’s family, in exchange for their interest in the company.
One keeps the business alive. The other transfers ownership cleanly. A policy structured for one does not automatically serve the other.
Key-Person Coverage
Think about who, if they disappeared tomorrow, would take real revenue with them. In a small firm that is often an owner, but it can equally be the person holding the key client relationships or the technical knowledge nobody else has.
The business typically owns the policy, pays the premiums, and receives the proceeds. What it buys is time — to recruit a replacement, reassure clients and lenders, and cover the revenue dip that follows.
Buy-Sell Funding
Here is where good agreements fail. The document can specify the purchase price precisely and still not work, because the surviving owners do not have the money.
Consider what the alternatives actually look like. Paying from company reserves drains working capital at the moment the business is least stable. Borrowing means approaching a lender shortly after losing an owner, which is not when lenders are at their most enthusiastic. An installment arrangement ties the departing family’s financial security to how the business performs over the following years, without giving them any say in it.
Life insurance is commonly used here because it produces money at the moment the obligation arises, rather than requiring the business to find it.
Who Owns the Policy Matters
This is not administrative detail. In a cross-purchase arrangement, the owners typically hold policies on one another individually. In an entity redemption, the business holds a policy on each owner.
Which structure fits depends on the number of owners, the entity type, and tax consequences that differ meaningfully between the two. That analysis belongs to your attorney and your CPA together, and it should happen before any policy is purchased rather than after.
The Valuation That Drifts
An agreement signed six years ago names a value from six years ago. If the business has grown since, the agreement may commit to a purchase price well below what the interest is now worth, and the policy that funds it will have been sized to the old figure.
Agreements should be reviewed periodically for exactly this reason. So should the coverage behind them.
A Familiar Scenario
Two partners in a Southern California trade business signed a buy-sell agreement when they incorporated. Neither ever funded it. Nine years later the business is roughly three times the size, the agreement still names the original valuation, and no policy exists at all. The document describes an outcome that nobody can currently pay for.
Where We Fit, and Where We Don’t
The agreement is legal work. Drafting belongs to an attorney; valuation and tax treatment belong to your CPA. We do not do either, and would not pretend to.
What we do is the funding side — evaluating the life and disability coverage that turns the agreement’s terms into available cash, and coordinating with your attorney so the policies and the document actually match. Mismatches between the two are more common than you would expect.
If you have an agreement that has never been reviewed, or no agreement at all, we’re happy to talk it through. We’re Here To Help!
This article is general education and is not legal, tax, or accounting advice. Buy-sell agreements should be drafted and reviewed by qualified legal and tax professionals. Insurance availability and suitability depend on individual circumstances and underwriting.