Business Valuation
The Five Planning Problems Every Business Owner Has (and Most Haven’t Funded)
Succession, key people, retention, a retirement locked inside the company, and an estate that can’t be split. Here is how each one works and what typically solves it.
The short answer
Nearly every closely held business carries the same five exposures: an ownership transfer nobody funded, a key person nobody insured, top talent the owner can’t retain, a retirement that depends on selling the company, and an estate that can’t be split fairly. Each one is a cash problem, and each has a known solution.
A closely held business runs on a small number of people. Take one of them out on a random Tuesday and the company doesn’t slow down; it stops, and it needs money nobody set aside. Owners usually know this in the abstract. What they rarely have is a funded answer.
Here is the question we open with. Try answering it for your own company, in one breath:
“If one of the owners died last night, who owns the business this morning, and where does the money come from?” The first half is about control. The second half is about cash. Most owners can partly answer the first and can’t answer the second at all.
Problem 1: Succession. Who buys the interest, and with what?
An owner dies or becomes disabled. The surviving partner now shares the company with a spouse who can’t run it, and has no cash to buy her out. Both families lose. A buy-sell agreement is supposed to settle this in advance, which is why funding it matters more than writing it. Many agreements we review say the owners “shall” buy insurance and nobody ever did, or the coverage matches a valuation from years ago.
Two cautions. Disability is the other half of this problem and is solved with a disability buy-out policy, not life insurance. And the 2024 Supreme Court decision in Connelly v. United States changed how company-owned buy-sell funding is valued. We cover both structures and that case in buy-sell agreements after Connelly.
If you think the bank will cover it, think again. A lender that just lost one of two personal guarantors usually tightens a line of credit; it rarely extends one.
Problem 2: Key person. What stops if this person doesn’t come in Monday?
The key person often isn’t an owner. It’s the estimator who is the only one who can quote a job, the salesperson who holds the relationships, or the name on a bond or loan covenant. Key person insurance is simple: the business owns the policy, pays the premium and is the beneficiary, so cash arrives to survive the gap and hire a replacement.
A useful test: anyone who fits two or more of these is key.
- If they don’t come in Monday, what stops?
- Is their name in a contract, license, bond or loan covenant?
- Do client relationships leave when they leave?
- Could you replace them in 90 days?
Sizing it three ways (hypothetical)
Take an operations manager earning $150,000 who is the only person able to quote and schedule fabrication work at a 22-employee supplier. A planning team would triangulate three numbers rather than guess one:
| Method | How it works | Illustrative result |
|---|---|---|
| Multiple of compensation | Total comp × 5 to 10 | $750,000 – $1,500,000 |
| Contribution to profit | Profit tied to the role × years to recover | $540,000 |
| Replacement cost | Recruiting, signing, lost output, owner time | $382,500 |
| Lender covenant | Face amount the bank requires assigned | $400,000 |
In that illustration, survival plus rebuild lands near $920,000, so a recommendation around $1,000,000 is defensible. The premium is generally not deductible (IRC 264).
The rule that cannot be fixed later: for employer-owned policies issued after August 17, 2006, IRC 101(j) generally requires written notice and the employee’s signed consent before the policy is issued, including the maximum face amount and that the business is beneficiary. Miss it, and the death benefit above premiums paid can become ordinary income to the business. That applies even to a sole owner insuring himself. Your CPA also files Form 8925 each year.
Problem 3: Retention. How do you keep the people who run it?
Everything a small employer can offer is taxable salary a competitor can beat. The answer is a selective benefit the competitor can’t easily match.
The simplest version is a Section 162 executive bonus. The business pays a bonus; the executive reports it as income and uses it to pay premium on a permanent policy they own from day one. The business generally deducts the bonus as compensation, provided total pay is reasonable. There’s no IRS plan filing, no nondiscrimination testing, and the owner picks exactly who participates. A “double bonus” grosses it up so the executive nets the full premium:
| Item | Single bonus | Double bonus |
|---|---|---|
| Bonus paid | $20,000 | $29,412 |
| Executive’s tax (32% assumed) | $6,400 out of pocket | $9,412 from the bonus |
| Reaches the premium | $20,000 | $20,000 |
| Business after-tax cost (21% C-corp rate assumed) | $15,800 | $23,235 |
The formula is premium ÷ (1 − the executive’s tax rate). Payroll taxes apply too, so your CPA supplies the real rates. Two caveats: for owners of S-corps and partnerships, a bonus to yourself is largely circular, so the entity type is the first question; and if the owner wants premiums back when someone leaves, that is a different design.
Bigger tools: split-dollar and deferred compensation
Split-dollar splits the cost and benefits of one policy between the business and an executive, and who owns the policy decides which of two tax regimes applies. Nonqualified deferred compensation is a written promise to pay a key person later, with no contribution limit and full choice of participants. To preserve the deferral it must stay an unfunded promise, so companies commonly back it informally with a company-owned policy. Both fall under complex rules, including Section 409A, where a failure can make deferred amounts immediately taxable to the executive plus a 20% additional tax. These are designed by specialists with your attorney and CPA, never off the shelf.
Problem 4: “The business is my retirement.”
It’s the most common sentence in this market. It’s also a plan that needs a willing buyer with cash in the exact year you’re ready, and it has no fallback. A permanent life insurance policy isn’t the whole answer, but it is an asset that lives outside the business. The planning question is simple: who is your buyer, and what happens if that person isn’t there?
Problem 5: An illiquid estate and children who aren’t in the business
One child runs the company; two don’t. The estate is mostly one asset that can’t be split, sold quickly or divided fairly. “Split everything equally” hands two children a minority stake they can’t use and hands the third two partners he can’t buy out. Life insurance is the equalizing asset: the business goes to the child who runs it, and a comparable death benefit goes to the others.
Notice what’s not on this list: federal estate tax. Under current law the exclusion is $15 million per person for 2026, so most owners have a liquidity problem, not a tax problem. Confirm current figures with your advisor, and see the 2026 estate tax and the ILIT for the details.
How fast the problems show up: a hypothetical
Two partners own an HVAC company 50/50: eleven employees, roughly $2.4 million of value, and a $300,000 equipment line both men personally guaranteed. One service manager quotes every commercial job. One partner has three kids; one works in the shop. Two questions and two follow-ups surface three of the five problems in about ninety seconds:
- “Who owns the business this morning?” “I guess my partner and my wife.” That’s succession, unfunded.
- “Where does the money come from?” “The bank, maybe?” That’s the wrong answer.
- “Who quotes the commercial work?” One person, with nothing on her. That’s key person.
- “Do all three kids work in the business?” Just one. That’s estate equalization.
How a coordinated team handles it
None of these are solved by one person with one product. Your attorney drafts the buy-sell, trusts and plan documents. Your CPA confirms the tax treatment and files what needs filing. Our specialist team maps all five problems, sizes the funding and places the coverage, so one policy isn’t trying to do two jobs. That’s how we plan business, personal and financial together. If you carry business debt as well, our Debt 2 Capital review is often a useful companion conversation, and the full approach is on our advanced markets page.
Go deeper: how Longtable approaches Business Valuation.
Illustrative examples. Confirm the specifics for your situation with your own CPA or attorney.