Buy-Sell Funding Guide
A buy-sell agreement decides what happens to ownership when an owner exits, retires, or passes away. Funding is what makes sure the money is actually there to carry it out. An agreement without funding is a plan without a budget.
Who this is for
- Businesses with more than one owner
- Partners who want a smooth, fair, pre-agreed transition
- Owners with an agreement they've never confirmed is funded
What you’ll learn
- What a buy-sell agreement is meant to do
- Why an unfunded agreement can stall
- How life insurance can make it payable
- What to align with your attorney and CPA
The gap most owners miss
Many businesses have a buy-sell agreement. Far fewer have confirmed it's funded. That gap is easy to miss because the agreement feels like the finish line, when it's really only half of the plan.
An agreement without funding behind it can force the remaining owners to scramble for cash, take on debt, or end up in a dispute with a departing owner's family, exactly when stability matters most.
How life insurance funds a buy-sell
Life insurance can provide the funds needed to purchase a departing owner's share at a triggering event, so the agreement executes smoothly instead of stalling. The money is there, the transition is clean, and the surviving owners keep control of the business.
Common structures
Which structure fits depends on legal and tax factors that your attorney and CPA determine. We align the insurance-based funding to the structure they establish, rather than the other way around.
- Cross-purchase: the owners hold policies on one another
- Entity purchase (redemption): the business holds the policies
- Hybrid approaches, depending on the number of owners and the goals
Why funding matters as much as the agreement
A well-drafted agreement tells everyone what should happen. Funding is what makes it possible. Reviewing the two together, and keeping the funding current as the business grows in value, is what turns a document into a plan that actually works.
Questions to confirm
- Do we have a buy-sell agreement, and is it current?
- Is it actually funded, and for the right amount?
- Which structure fits our ownership and goals?
- Have our attorney and CPA drafted and confirmed the details?
Common risks business owners overlook
- Having an agreement but never confirming it's funded
- Funding that hasn't kept pace with the business's growth in value
- A valuation method in the agreement that's outdated or unclear
- Assuming the remaining owners could simply buy out a share with cash on hand
Your next step
The fix is usually straightforward once the agreement and the funding are looked at together. A Business Protection Review lines up the insurance side with what your attorney and CPA have drafted.
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Educational only. Business continuity strategies involve tax, legal, and valuation considerations that must be confirmed with your CPA, attorney, and other qualified professionals. Guarantees are subject to the claims-paying ability of the issuing carrier. NOI does not provide tax, legal, or investment advice.