The problem, in one sentence
A buy-sell agreement is only as good as its funding — and funding is set against a valuation that goes stale the moment the business grows.
The pattern is remarkably consistent. Partners sign a buy-sell when the business is worth, say, $2 million. They fund it with cross-purchase or entity-owned life insurance sized to that number. Then everyone goes back to running the business. Five or eight years later the business is worth $4.5 million, the policies still say $2 million, and nobody has looked at the agreement since the signing dinner.
If a triggering event happens in that window — death, disability, departure — the surviving partners owe the difference in cash they usually don't have, or the deceased partner's family is forced to accept a buyout far below the interest's real value. Either outcome is a planning failure that lands squarely on whichever advisor was "handling" the client.
Why the gap persists
- Valuation friction. The honest reason reviews don't happen: getting a business value historically meant commissioning a $5,000–$20,000 appraisal or accepting a rule-of-thumb guess. Neither happens annually, so the funding review doesn't either.
- Formula-clause complacency. Many agreements use a formula ("book value plus…", "last agreed value") that everyone assumes is self-updating. Formula clauses drift from market reality — often dramatically — and "last agreed value" clauses frequently show a number nobody has re-agreed to in a decade.
- Nobody owns the review. The attorney drafted it, the insurance agent funded it, the CPA files around it, the RIA plans around it. Each assumes another professional is monitoring the number.
The advisor opportunity
For an RIA or CPA serving business owners, the buy-sell funding review is close to an ideal engagement move:
- It's concrete. "Your agreement is funded to $2M; the business supports a value near $4.5M today; the gap is $2.5M per triggering event" is not an abstract planning observation. It's a number with consequences the client can immediately grasp.
- It's discoverable in one meeting. With a current planning-stage valuation in hand, comparing it against policy face amounts takes minutes.
- It creates follow-on work. Closing the gap means updated coverage, sometimes a redrafted agreement, sometimes an entity-structure conversation — legitimate, valuable work for the advisory team.
- It recurs. A growing business re-opens the gap every year. The annual re-check institutionalizes the advisor's role.
Worked example. Two partners, 50/50, HVAC contractor. Buy-sell signed in 2019 at an agreed value of $1.8M, funded with $900K of cross-owned life insurance each. By 2026: revenue nearly doubled, 480 maintenance agreements, SDE of $780K. A planning-stage triangulated valuation lands the business near $3.4M.
The gap: each partner's interest is now worth ~$1.7M against $900K of funding — an $800K shortfall per partner. If a partner dies, the survivor either raises $800K in cash, signs a note the family must trust, or the family sells at a discount. Every one of those outcomes was avoidable with a $350 valuation refresh and a policy review.
Running the review: a five-step framework
- Pull the agreement. Identify the valuation clause type — fixed/agreed value, formula, or appraisal-on-trigger — and the date the operative number was last set.
- Establish today's planning value. A planning-stage triangulated valuation (income, market, and asset methods) is sufficient here — the goal is detecting a material gap, not producing a litigation-grade appraisal. If the gap is material and a transaction or dispute looms, that's when a credentialed appraiser (ABV, ASA, CVA) enters.
- Compare against funding. Face amounts per partner versus the value of each partner's interest at today's number. Include disability buyout provisions, which are even more commonly unfunded.
- Present the gap in dollars. Not "your agreement may be underfunded" — rather "a triggering event today creates a $800,000 cash obligation your current funding doesn't cover."
- Set the annual re-check. Put the valuation refresh on the same calendar as the client's annual review. A growing business quietly re-opens the gap every year; the annual number keeps the agreement honest.
Handling the classic objections
"The agreement has a formula, so it self-adjusts." Test it: compute the formula's current output and set it beside a market-based valuation. Book-value formulas in particular ignore goodwill entirely — in service businesses, that's most of the value.
"We'll deal with it when something happens." The entire point of a buy-sell is that "when something happens" is the one moment renegotiation is impossible: one party is deceased, disabled, or departing, and every dollar of ambiguity becomes a dispute between grieving families and surviving partners.
"Insurance is expensive right now." The alternative to insuring the gap isn't avoiding the cost — it's transferring an unfunded multi-hundred-thousand-dollar obligation onto the surviving partners at the worst possible moment. Present it that way.
The bottom line for advisors
Every business-owner client with partners either has a buy-sell agreement that hasn't been value-checked in years, or doesn't have one at all. Both are findings. A fast, credible, current valuation converts the buy-sell review from an expensive special project into a routine — and it's one of the clearest demonstrations of advisor value an owner ever sees, because the number, the gap, and the fix all land in a single meeting.