Your Buy-Sell Agreement Has a Gap — And It Could Cost Your Family Everything

Most business owners have a shareholder agreement in place. Far fewer have it funded in a way that actually protects the people who matter most.

Picture two brothers. They co-own a business they've built together over the better part of a decade. They agree on almost everything — how to run it, where to take it, and what it's worth. Then someone asks how they'd fund their buy-sell agreement if one of them died tomorrow.

One brother's answer: "Why bother with life insurance? We'll just use a note payable."

It sounds reasonable. Simple. Clean. Until the other brother puts it plainly: "If something happens to me, I don't want my wife waiting years to get paid."

That sentence exposes the single biggest flaw in how most business owners think about buy-sell agreements. They treat it as a legal problem — get a document signed and move on. But a buy-sell agreement isn't just a business decision. It's a family decision. And how you fund it determines whether it actually works when it's needed most.

"A buy-sell agreement that isn't properly funded is little more than a letter of intent — it describes what should happen without guaranteeing that it can."

THE NOTE PAYABLE TRAP

A promissory note is the most common "low-cost" alternative to insurance-funded buy-sell agreements. On paper it's logical: the surviving owner agrees to pay the estate over time. No premiums. No underwriting. No complexity.

But in practice, a note payable transfers the entire burden of the buyout onto three parties who are already under enormous strain.

WHAT INSURANCE ACTUALLY DOES IN THIS CONTEXT

Life insurance in a buy-sell agreement isn't a cost — it's the mechanism that makes the agreement enforceable in practice. The death benefit provides immediate liquidity at precisely the moment when a business is most vulnerable and a family is most in need.

In a corporate-owned structure, which is common in Canada, the corporation holds policies on each owner's life. When one owner dies, the corporation receives the death benefit tax-free, then uses those proceeds to redeem the deceased's shares. The surviving owner maintains full control. The estate receives fair value quickly. The business continues without financial disruption.

The alternative — watching a grieving family wait years while hoping the business stays healthy enough to make installment payments — is a risk most founders never intend to leave behind. But without proper funding, that's exactly what a note payable creates.

THE QUESTION MOST ADVISORS DON'T ASK

Most business owners with a shareholder agreement assume the hard work is done. But having an agreement and having a funded agreement are two very different things. A document that says "the surviving shareholder will purchase the shares" is meaningless if there's no money to do it with when the time comes.

The real question to ask is not what happens to my shares when I die — it's where does the money come from, and how fast does my family actually get it?

If you don't have a clear answer to that second question, the agreement isn't finished.

"The best time to review your buy-sell funding is before you need it — because once you need it, it's too late to change it.

A FEW THINGS WORTH REVIEWING NOW

If you have a shareholder agreement in place, consider whether the following are current and aligned:

• The insurance coverage amount relative to today's business valuation (many policies are underinsured because the business has grown)

• The ownership and beneficiary structure of the policies (corporate-owned vs. personally-owned has meaningful tax implications in Canada)

• Whether disability or critical illness has been addressed alongside death

• Whether the agreement has been reviewed by both legal counsel and a financial advisor in the last three to five years

Business valuations change. Ownership stakes shift. What was adequate five years ago may leave a significant gap today.

This article is intended for general informational purposes only and does not constitute legal, tax, or financial advice. Every business owner's situation is unique. Please consult with a qualified advisor before making changes to your shareholder agreement or insurance arrangements.