A Second Look at the Financial Side of the Agreement
Buy Sell Advisory reviews the financial planning surrounding an existing buy-sell agreement.
The review is designed to help identify questions and planning gaps that should be discussed with the client's attorney, CPA, valuation professional, insurance professional, and financial advisors.
What the review covers
Agreement Structure
- Triggering events
- Purchase obligations
- Ownership percentages
- Entity purchase vs. cross-purchase structure
- Payment provisions
- Existing valuation language
Legal interpretation and amendments should be handled by the client's attorney.
Business Value
Whether the value being used for planning appears current and appropriate.
- Revenue changes
- Profitability changes
- Business growth
- Acquisitions
- Debt
- Ownership changes
- Industry changes
A formal appraisal may be recommended when appropriate.
Funding
How the buyout is expected to be funded.
- Life insurance
- Disability buyout insurance
- Company cash
- Installment payments
- Borrowing
- Personal assets
- Seller financing
- Future cash flow
- Combination strategies
Funding Gap
Compare the estimated obligation with the funding currently available.
Insurance Structure
When insurance is involved:
- Amount of coverage
- Ownership
- Beneficiary structure
- Policy type
- Existing cash value
- Whether coverage still matches the agreement
- Whether ownership structure matches the intended transaction
Advisor Coordination
Issues that may require discussion among:
- Attorney
- CPA
- Valuation professional
- Insurance specialist
- Financial advisor
- Estate planning advisor
A Simple Review Process
Gather
Collect
- Existing buy-sell agreement
- Operating or partnership agreement
- Ownership percentages
- Existing insurance
- Recent financial information
- Existing valuation information
Review
Evaluate
- Agreement
- Value
- Funding
- Liquidity
- Insurance
- Ownership
Identify
Organize the major planning considerations
- Outdated value
- Underfunded obligation
- Mismatched insurance
- Liquidity shortfall
- Ownership concerns
- Tax coordination questions
- Estate planning coordination issues
Coordinate
Work with the client's existing professional advisors to evaluate potential solutions.
The Buy-Sell Review Summary
A concise report that organizes what we found so the right professionals can act on it.
- Business Snapshot
- Ownership, estimated value used for planning, ownership percentages, agreement structure
- Agreement Snapshot
- Type of agreement, triggering events, valuation method, purchase structure
- Funding Snapshot
- Estimated obligation, existing insurance, other available funding, estimated funding gap
- Advisor Discussion Items
- Questions for the attorney, CPA, valuation professional, insurance professional, estate planner, and financial advisor
Valuation, Funding, Liquidity, and Coordination are each scored 1–5. The scorecard is an educational planning tool, not a legal opinion or formal valuation.
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Educational planning tool. Not a legal opinion or formal valuation.
How a funding gap appears
Reasons to Review a Buy-Sell Agreement
A review may be appropriate when any of the following apply:
- The agreement hasn't been reviewed in several years
- Business value has increased significantly
- Ownership has changed
- New partners have joined
- Insurance was purchased years ago
- An owner is approaching retirement
- The succession strategy has changed
- The owners aren't sure how the buyout would be funded
- Business debt has changed materially
- The company has made acquisitions
- An owner has experienced a major health change
- The agreement uses an old valuation method
- The business uses an entity-purchase or redemption arrangement
- An attorney or CPA is reviewing the owner's estate or succession plan
- The owners are considering a sale or internal transition
- An owner has left or is expected to leave the business
Keep the Agreement Aligned With the Business
An optional periodic review keeps the financial assumptions current. A buy-sell agreement should evolve as the business evolves.
- Business value
- Ownership
- Funding
- Insurance
- Debt
- Major business changes
- Retirement timing
- Succession objectives
- Estate planning changes
Don't Wait for a Triggering Event to Find the Problem.
If your business has a buy-sell agreement, operating agreement, shareholder agreement, or partnership agreement containing buy-sell provisions, review the financial assumptions before they are tested.
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