What CPAs Should Look for When Reviewing a Client’s Buy-Sell Agreement

The financial side of a buy-sell agreement touches valuation, cash flow, entity structure, and tax treatment — areas where the CPA's perspective is essential. Spotting a mismatch early gives the client time to address it with their attorney and other advisors.

A CPA may see years of increasing earnings while the buy-sell agreement still refers to an older fixed price. That mismatch is a reason to ask whether the price has been maintained, not a reason to replace it informally with a multiple of current earnings. The agreement’s actual pricing procedure and the appropriate valuation standard still need professional attention.

When the agreement uses a formula, help the client understand its inputs. Owner compensation, unusual income or expenses, debt, excess cash, and accounting changes may affect the result. Run the formula with current information and compare it with the owners’ expectations. If the result appears disconnected from the business, coordinate with counsel and a qualified valuation professional rather than treating the formula as self-validating.

Financial statements can also reveal new obligations, ownership changes, or distributions that affect funding capacity. The value of this perspective is early detection. A tax return or balance sheet alone does not establish what a particular interest must be purchased for, but it can show why the existing assumptions deserve another look.

A purchase that looks affordable under current earnings may be difficult after the business loses an owner who manages operations, generates sales, or maintains key relationships. Separate the buyout cost from the operating impact of replacing that person. The company may need both purchase money and additional working capital at the same time.

Model proposed installments alongside taxes, debt service, payroll, maintenance capital expenditures, and ordinary distributions. Use a weaker operating case as well as a normal year. A plan that works only if earnings keep rising may expose the remaining owners and the seller to avoidable risk. Explain assumptions clearly rather than presenting the model as a forecast.

Review debt covenants and likely financing restrictions. A lender may limit distributions, additional borrowing, or redemptions. Any necessary legal interpretation belongs with counsel, and financing availability should be discussed with the lender. An unused credit line is not automatically unrestricted buyout funding, especially if its purpose is working capital or its terms can change.

Entity-purchase and cross-purchase arrangements can produce different tax and basis outcomes depending on the entity and transaction. Those differences should be evaluated for the actual client rather than described as automatic advantages. Policy ownership, premium treatment, reporting requirements, and any proposed policy transfers also belong in the professional analysis.

For certain entity-purchase arrangements using company-owned life insurance, Connelly raises an important estate-tax valuation question. The proceeds can increase the company’s value, and a redemption obligation is not automatically an offsetting liability for that analysis. The tax valuation and the agreement’s purchase price should be considered separately before the funding implications are calculated.

Coordinate the CPA’s analysis with the attorney and valuation professional. A conclusion about expected estate-tax value may not resolve the contract price, and a contract price may not control estate-tax reporting. A financial review can connect those results to available money, but it should not be mistaken for a legal opinion, tax opinion, or formal appraisal.

Compare the ownership schedule used for financial and tax reporting with the agreement’s parties and the insurance schedule. An interest may have been transferred or a new owner admitted without the funding being updated. Unequal ownership also means that identical policy amounts may not cover the relevant purchase obligations equally.

For each policy, confirm the owner, insured person, beneficiary, current benefit, and premium responsibility with the insurance professional. Ask whether loans, upcoming term expirations, or other contract features affect the expected proceeds. If an apparent mismatch needs correction, coordinate it before changes are made; transferring a policy or changing the overall structure may have consequences beyond bookkeeping.

End the review with specific follow-up items. Who will obtain the current policy records? Who will clarify the valuation provision? Who will assess additional coverage or financing? Buy Sell Advisory can help connect the funding analysis to the client’s situation while the CPA and attorney remain the client’s tax and legal advisors. The best result is a shared understanding of what the plan can support and what remains unresolved.