Business insurance → Buy-sell
Independent financial planning · Alberta & Yukon
Funding a buy-sell agreement
A buy-sell agreement sets out what happens to your shares if you die or leave the business. But an agreement only works if the money is there when it’s needed. This conversation is best had long before you need it.
Why funding matters
The document is not the plan
A buy-sell agreement says that if one shareholder dies, the others buy their shares from the estate at an agreed price. It’s a good and necessary document.
On its own, though, it’s a promise to come up with a large sum on short notice, from a business that has just lost one of its owners. The survivors are obliged to buy and the estate is obliged to sell. Whether that sale can actually happen depends on whether anyone funded it.
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Insurance is what turns the document into a transaction.
For many owners, it’s the most practical way to make sure the money arrives when it’s needed.
Beyond death
What a private policy can cover
What your agreement should cover
Death
Usually funded
Disability
Rarely funded
Critical illness
Rarely funded
Retirement
Rarely funded
Wanting out
Rarely funded
Structure
Three ways to fund it, and they aren't equivalent
Who owns the policy affects how your estate is taxed when the shares are bought.
There isn't a default winner
The right choice depends on how many owners there are, their ages, the lifetime capital gains exemption and the corporation’s situation. It’s a decision to make with your accountant and lawyer.
The clause people skip
How is the price calculated?
Every buy-sell needs a way to set the price: a fixed price the owners update each year, a formula (such as a multiple of earnings or book value), or an independent valuation at the time.
Fixed prices go out of date.
It’s common to see agreements with a price set years ago, for a business that has grown a lot since. The estate may then have to sell for much less than the shares are worth.
Formulas last longer but need testing.
Run yours against last year’s numbers. If the answer surprises either of you, fix it now, while you can both still agree.
Review your agreement against these
When was the valuation last updated?
Does the formula match the business's actual earnings profile?
Is the formula applied consistently to all shareholders?
Who pays for a formal valuation if needed?
Is there a dispute mechanism if partners disagree on value?