What business owners should review in their buy-sell funding, key-person coverage, and continuity planning

Most business owners put protection strategies in place at some point, but the business keeps evolving. Over time, valuations change, ownership shifts, and key people take on new responsibilities, while buy-sell agreements and insurance often remain untouched.

Having those pieces in place is not the same as knowing they would work as intended if an owner died, became disabled, or had to step away unexpectedly.

For business owners, there are three areas worth pressure-testing regularly: buy-sell funding, key-person risk, and the broader continuity plan connecting them.

1. Would your buy-sell arrangement work today?

A buy-sell agreement can establish what happens to an owner’s interest after a triggering event, such as death, disability, or retirement, but the agreement itself does not create the liquidity needed to carry out those terms.

As Bryan Scott, our Director of Insurance Solutions, puts it, “The agreement says what should happen. It doesn’t say where the money comes from.”

Consider two equal partners who put a cross-purchase arrangement in place when their business was worth $2 million. Life insurance was purchased to help fund the purchase of the other partner’s interest.

Ten years later, the company is worth $6 million.

If the funding strategy has not kept pace, the surviving owner could face a significant gap between the amount available and the amount required to purchase the deceased owner’s interest.

Where does the difference come from? Potentially from cash reserves, borrowing, future business cash flow, payments to the estate over time, or some combination of those options. That can put financial pressure on the company at exactly the wrong time, when it may already be dealing with leadership, client, and operational disruption.

Watch for a buy-sell valuation gap

A growing business can create a buy-sell valuation gap when the assumptions behind the original funding strategy no longer reflect what the company is worth today.

"Usually, the issue isn't that no planning was done," Bryan says. "It's that the business kept growing and the funding strategy stayed where it was."

That is why our team does not look at a buy-sell agreement in isolation. We want to understand how the agreement, current business value, ownership structure, and funding strategy work together.

Among the questions worth reviewing:

• What is the business worth today compared with when the arrangement was established?
• How is that value determined, and when was it last updated?
• Who owns the insurance policies, and who receives the proceeds?
• Does the current coverage reasonably align with the anticipated purchase obligation?
• Has ownership changed since the strategy was put in place?
• What happens if an owner becomes permanently disabled rather than dies?

That last question is easy to overlook. A death benefit may help fund an ownership transfer after death, but a serious disability can create many of the same ownership and financial issues without triggering that benefit. Depending on the agreement, disability buy-out coverage may be one way to address that funding need.

The legal and tax structure should be reviewed with the appropriate professionals. From a financial planning perspective, however, there is one question every owner should be able to answer:

When was the last time your buy-sell funding was checked against the current value of your business?

Meaningful changes in business value, ownership, or the owners themselves are natural times to revisit it.

2. Who does your business depend on more than you realize?

Owners naturally spend a lot of time thinking about what happens if something happens to them.

Key-person risk asks a different question: Is there anyone else whose absence could materially disrupt your business?

That person may not have any ownership at all.

It could be the rainmaker responsible for a large share of new revenue. The technical leader who holds years of institutional knowledge. The executive managing the company's most important client relationships. Or the person who understands a critical process that has never been adequately documented.

That creates concentration risk: too much of the company's revenue, relationships, knowledge or execution capability residing with one person.

Imagine a specialty contracting business generating $8 million in annual revenue. One estimator has developed many of its client relationships and understands the company's pricing methodology better than anyone else. Much of that knowledge lives in his head. If he were suddenly unable to work for six months, the company could lose the ability to bid new projects effectively while trying to recruit and train someone capable of stepping into the role.

The financial impact may be much larger than the person's salary. You'll want to consider both what it would cost to find and train a replacement and how much revenue could be lost or delayed during the transition.

Key-person coverage can provide financial runway while the company adjusts. With key-person coverage, the business typically owns the policy and receives the proceeds, giving it additional resources to absorb the financial impact of losing that person. In Bryan’s words, "Key-person insurance isn't really about the person. It's about time."

The goal is to give the business enough room to respond thoughtfully instead of making major financial or operational decisions under immediate pressure.

3. What happens after the policy pays?

Buy-sell funding and key-person coverage can solve important financial problems. But liquidity is only one part of being prepared.

Insurance can provide liquidity. It cannot decide who runs the company, transfer critical client relationships, or make sure the right people have the authority and information they need to keep the business moving.

That is where broader continuity planning matters.

If an owner died, became disabled, or suddenly had to step away, consider:

Decision-making and leadership. Who can make critical decisions, access accounts and take responsibility for running the company?

Financial obligations. How would the business continue meeting payroll, debt service and vendor commitments while it adjusts?

Ownership and family expectations. Does the agreement provide a clear path forward, and does your family understand what is intended to happen?

Professional coordination. Do the insurance strategy, ownership agreement, current valuation, estate planning, and tax considerations support the same intended outcome?

Disability can be particularly revealing.

Imagine a founder who owns 60% of a family business and suffers a disabling stroke. The founder survives but can no longer participate in running the company. The other owners may now be managing the business while the founder still holds a controlling interest. If the agreement does not clearly address disability and there is no funding mechanism for a potential ownership transition, everyone can end up in a difficult position.

No one can plan for every scenario. What matters is spotting the ones that could change your business and making sure the financial and operational pieces are ready before they do.

Five questions every business owner should be able to answer

1. If something happened to me tomorrow, who has the authority to make decisions, and do they know it?

Not simply who is supposed to step in eventually, but who can keep the business moving while everything else gets sorted out.

2. Does our buy-sell funding reflect what the business is worth today?

Businesses grow. If the funding strategy has not changed with the valuation, an ownership transition could create an unexpected liquidity problem.

3. What happens if it is disability, not death?

A serious disability can create many of the same ownership and financial challenges without triggering a life insurance benefit.

4. Is there anyone whose absence would stop revenue, not just slow it down?

If critical relationships, production capability, or institutional knowledge depend on one person, that concentration deserves attention.

5. Could the business survive the next 90 days without me, financially as well as operationally?

Leadership matters, but so do payroll, debt payments, cash flow, and other obligations that continue while the company adjusts.

Your business changed. Your protection strategy should too.

A company that has doubled or tripled in value may need a different funding strategy than it did ten years ago. A growing team may have new key-person dependencies. An owner approaching retirement may face very different succession considerations than when the original agreement was signed.

It's not really about buying more coverage. It's about making sure your ownership arrangements, financial resources, and continuity planning still reflect the business you've actually built.

Business Protection Review

If it has been several years since your business protection strategy was revisited, our team can help you take a fresh look. Here’s what we can review together:

• How your current buy-sell arrangement is funded
• Existing coverage relative to the current business valuation
• Ownership transition assumptions
• Key-person dependencies and concentration risks
• Disability-related funding considerations
• Financial continuity needs
• Areas that may need additional coordination with your attorney, CPA, valuation professional, or other advisors

If the business has changed since the planning was put in place, it may be time to make sure the strategy has kept up.

Does that plan still work for the business you have today?