Business Owners Suite · Business Valuation
Business Transition
Valuation is the number the rest of the plan is built on. It sets the buy-sell price, it sizes the funding, and it anchors what your estate will be measured against. A valuation established while everyone is at the table is a fact. A valuation argued after an event is a dispute.
Worth Knowing
Valuation is treated as an administrative step. In the carrier documentation it is step one, ahead of coverage and ahead of counsel.
Under both an entity purchase and a cross purchase, the buy-sell agreement would be relevant to setting the value of the business interest for federal estate tax purposes. The number written into the agreement does not stay inside the agreement. It follows the owner into the estate.
Source: North American Company for Life and Health Insurance, Buy-sell with life insurance, 215NM-3a
The published sequence for getting a buy-sell in place starts with documenting all business owners, the estimated business value, and each owner's percentage. Determining the right amount of coverage is second. Meeting the attorney to draft the agreement is third. The number leads, everything else follows from it.
Source: North American Company for Life and Health Insurance, Buy-sell with life insurance, 215NM-3a
The Structure
What it does
Independent valuation gives the agreement a price nobody has to negotiate under pressure, and gives underwriting a basis for the coverage amount the company is applying for.
What has to be true
A valuation is a snapshot. Companies that grow, take on debt, lose a major account, or add an owner have changed the picture. An agreement priced on a five-year-old number is priced wrong, usually against the family of whoever left.
Where it comes apart
Formula clauses written into old agreements often bear no relationship to what the company is worth now. Reviewing the valuation method, not just the number, is part of the annual review.
The best time to agree on what the company is worth is while every owner still has an equal chance of being the buyer or the seller.
Begin the Conversation
Whether your agreements are drafted, outdated, or still an intention, this conversation is private, unhurried, and specific to your company.
Important: This page is general education. It is not legal, tax, accounting, or individualized financial advice. Buy-sell agreements, split dollar arrangements, deferred compensation plans, and trusts should be drafted by a qualified attorney, with tax treatment confirmed by a qualified tax professional. Life insurance policies contain costs, charges, limitations, exclusions, and conditions; coverage depends on underwriting and on the terms of the policy issued. Guarantees are backed by the claims-paying ability of the issuing insurance company. Policy loans and withdrawals reduce cash value and death benefit, are subject to interest charges, and are generally not subject to income tax provided the contract is not a Modified Endowment Contract as defined by Section 7702A of the Internal Revenue Code. Distributions from a Modified Endowment Contract are taxable to the extent of gain and may carry an additional tax before age 59 and a half. Carrier material referenced on this page is cited to its published form number.