For many business owners, buy-sell agreements and owner life insurance policies are established early in the life of the business and then revisited infrequently—if at all. While putting these structures in place is a critical first step, failing to update them as the business evolves can create significant financial and operational risk.

Today, more than five years removed from the COVID-19 pandemic, business owners are in a unique position. The economic disruption caused by COVID has now largely worked its way through financial results, leaving behind a more stable and representative earnings profile. This makes now an ideal time to reassess business value, revisit buy-sell agreements, and ensure that life insurance coverage aligns with reality.

The role of valuation in buy-sell agreements

A buy-sell agreement is designed to provide clarity and continuity in the event of the death, disability, retirement, departure of an owner, or other trigger events. These agreements establish information, such as:

• Who can or must purchase the ownership interest
• How the purchase price will be determined
• How the buyout will be funded

However, the effectiveness of any buy-sell agreement hinges on one key factor—an accurate and current business valuation. Without it, the agreement may produce a price that is outdated, inequitable, or financially unworkable.

Over time, businesses grow, contract, or change direction, and valuation methodologies or fixed-price provisions included in older agreements often fail to keep pace.

Aligning life insurance with business value

In many cases, buy-sell agreements are funded, in whole or in part, through life insurance. While life insurance is an effective tool because it provides immediate liquidity at the time of a triggering event, its usefulness is only as good as its alignment with the company’s value.

If your business has grown over the past five years or more—and for many, it has—there is a real risk that your existing policies are undervalued relative to current business value, or that your coverage amounts no longer reflect the economic burden of a buyout.

Periodic updates are critical to ensure that your life insurance coverage keeps pace with changes in business value and operating realities. A mismatch between value and insurance coverage can result in funding shortfalls, forcing surviving owners to seek outside financing or negotiate unfavorable terms during a time of disruption.

Why the post-COVID environment matters

From a valuation perspective, we are now at an important inflection point. Most professional valuations rely heavily on a historical analysis of financial performance, often focusing on a five-year period. Today, that five-year window reflects a post-COVID environment that is far more indicative of the “new normal” than the volatile and uncertain early pandemic years.

This means that pandemic-related anomalies are largely behind us with financial data now reflecting more normalized operations. As a result, valuations performed today are generally more reliable for planning purposes than those conducted during or immediately after the pandemic.

Economic factors driving change in value

Beyond COVID, several broader economic factors have materially influenced business values in recent years. These factors include:

• Interest rates: Higher rates increase discount rates and may compress valuation multiples
• Inflation: Rising costs impact margins and working capital requirements
• Labor market pressures: Wage inflation and labor shortages affect profitability
• Supply chain stabilization: Shifting cost structures and availability of inputs
• Access to capital: Changes in lending standards and financing costs

These factors can significantly impact both the income and market approaches to valuation. Ultimately, they can shift enterprise value—sometimes materially—since your last valuation.

Risks of an outdated agreement

A buy-sell agreement that hasn’t been reviewed in several years can create unintended consequences, including:

• Valuation discrepancies leading to unfair buyout pricing
• Insufficient insurance coverage to fund the transaction
• Tax inefficiencies due to changes in law or structure
• Ownership disputes among remaining owners and heirs
• Liquidity constraints that place strain on the business at a critical time

Regularly reviewing and updating your agreement will help to mitigate these risks and ensure the agreement functions as intended when needed most.

Why now is the right time

Several factors make now an ideal time to revisit your planning, such as:

• Reliable financial data: Five years of post-COVID history now provide a stable foundation for valuation
• Changing economic conditions: Interest rates, inflation, and market dynamics have shifted value drivers
• Potential growth (or contraction): Many businesses have materially changed in scale or profitability
• Outdated insurance coverage: Policy limits often lag behind business growth
• Evolving ownership and tax considerations: Changes in ownership structure and tax law may impact your planning

Taking action

Now is a great time for a coordinated review involving your valuation advisor, CPA, attorney, and insurance professional, so you can:

• Obtain a current business valuation
• Review the valuation provisions within your buy-sell agreement
• Assess whether life insurance coverage is sufficient and properly structured
• Evaluate funding mechanisms and liquidity considerations
• Update agreement terms to reflect current ownership and objectives

Final thoughts

A buy-sell agreement and its supporting life insurance structure are only as effective as their alignment with the current value of your business. With the benefit of stabilized post-COVID financial data and a rapidly evolving economic landscape, now is the right time to revisit both.

If you are ready to take next steps, please reach out to our Business Valuation team. We are here to offer the valuation support you need as you proactively plan to protect your business, prevent disputes, and ensure a smooth transition when the unexpected occurs.