Why Every Business Needs a Funded Buy/Sell Agreement
A successful business is often the product of years of dedication, partnership, and shared goals.
But what happens if one owner unexpectedly dies, becomes disabled, or decides to exit?
Without a properly structured and funded buy/sell agreement, your company’s future and your family’s financial security may be at risk.
1
What Is a Buy/Sell Agreement?
A buy/sell agreement is a legally binding contract between business partners or shareholders that outlines what happens to an ownership interest if one partner leaves, retires, becomes disabled, or passes away.
It ensures business continuity by defining:
How the ownership transfer will occur
How the business will be valued
Where will the money come from to fund the buyout
Without one, surviving partners and families can face conflict, liquidity issues, and tax complications.
2
Why Funding Matters
Even the best-written agreement fails without funding.
The “buy/sell” promise only works if liquid capital is available when a triggering event occurs.
The most common funding sources are:
Life insurance — provides tax-free proceeds on death
Disability insurance — provides funds if a partner becomes unable to work
Corporate cash reserves — typically less tax-efficient or impractical
Example:
If a shareholder dies, a life insurance policy owned by the corporation pays out tax-free proceeds, allowing the business to buy the deceased’s shares from their estate without affecting cash flow.
3
The Tax Advantages of Insurance Funding
Using corporate-owned life insurance (COLI) to fund a buy/sell agreement creates powerful tax benefits:
The death benefit is received tax-free by the corporation.
The proceeds (less the policy’s adjusted cost base) are added to the Capital Dividend Account (CDA).
The CDA allows a tax-free distribution to surviving shareholders.
This ensures that funds flow efficiently and the deceased’s estate receives fair value for the shares, while maintaining corporate liquidity.
4
Key Elements of a Well-Structured Agreement
To be effective, your buy/sell agreement should address:
Triggering Events — death, disability, retirement, voluntary sale
Valuation Method — fixed formula, agreed appraisal, or external valuation
Funding Mechanism — insurance, corporate reserves, or hybrid approach
Tax and Legal Review — ensure alignment with CRA and corporate law
Regular Updates — review every 2–3 years as business value changes
A coordinated approach between legal, accounting, and financial advisors ensures your agreement remains current and compliant.
5
What Happens Without a Plan
Without a funded agreement:
Surviving owners may lack funds to buy out the deceased partner’s shares.
The deceased’s family could inherit illiquid business equity but no cash.
The company may face forced sale or debt to cover buyout costs.
A funded buy/sell agreement prevents disputes and protects everyone’s interests.
Additional Tips for Business Owners
- Start early — wealth transfer planning works best when initiated before retirement.
- Revisit your plan annually to adapt to changes in tax legislation or family structure.
- Combine insurance, trust, and corporate tools for maximum tax efficiency.
Conclusion
Build a Legacy That Lasts
A funded buy/sell agreement isn’t just a document; it’s a cornerstone of responsible business ownership.
It ensures fairness, preserves harmony among shareholders, and protects your company’s legacy for the next generation.
At Eagle Wealth Partners, we help Canadian business owners structure, fund, and maintain buy/sell agreements that provide clarity, liquidity, and peace of mind.
Secure your company’s future today.
Eagle Wealth Partners
Markham, Ontario, Canada
+1 647 289 4847
sami@theabccanada.com