Partner Buy-Sell Agreement: Protecting $10M+ in Business Value
How two cybersecurity partners structured a buy-sell agreement funded by life insurance—and why valuing knowledge-based companies requires a different approach
Important: Insurance Products (Not Mutual Funds)
This case study discusses life insurance products and their tax treatment. Life insurance is regulated under the Insurance Act. This case study does not discuss or compare mutual funds offered through WhiteHaven Securities Inc.
Client Profile: Kevin & Michael
The Business
Industry
Cybersecurity company
Annual Profit
~$700K after tax
Growth Rate
20-30% year-over-year
Structure
Two operating companies, holding companies, family trusts
The Challenge
Missing Agreement
No buy-sell agreement in place
Value Challenge
Value in knowledge/expertise, not physical assets
The Risk
Company could face bankruptcy if partner dies
Business Model
Extremely lean: minimal assets, rented office
The Solution
Valuation Method
10-year cash flow projections
Company Valuation
Over $10M
Insurance Coverage
Each partner: 50% of company value
Key Feature
Options for future increases as business grows
Valuation Details
Base (EBITDA)
$700,000
Growth Assumption
25% annually for 10 years
Discount Rate
8% (net present value)
The Situation: No Buy-Sell Agreement
Two partners run a cybersecurity company with a complex corporate structure including holding companies and family trusts. Despite success and growth, there was no buy-sell agreement in place to define what would happen if one partner died.
The Risk
If the main shareholder and CEO died without adequate insurance, the company could face swift bankruptcy even with profitable operations. The business model is extremely lean: employees in Canada and abroad, minimal physical assets, partners working from a rented office.
The Value Challenge
The value of this business resides primarily in the partners' knowledge and expertise, not in physical assets or long-term contracts. The moment one partner closes their computer and doesn't show up, their knowledge disappears with them.
There are no buildings, no significant investment assets within the operating companies, no long-term assets. But the value locked in the operating company—especially in an industry experiencing 20-30% annual growth in a hot sector—needed protection.
The Approach: Cash Flow Projection Valuation
We worked with the partners and their professional team to establish a buy-sell agreement based on future cash flow projections, then fund it with life insurance.
Step 1: Establish Agreement
Created a partnership agreement that didn't exist, specifying fair market value of the operating company if one partner were to pass away.
Step 2: Value Using Cash Flow
Base: $700K EBITDA. Growth: 25% annually for 10 years. Discount: 8%. Result: Over $10M valuation.
Step 3: Prove Insurable Interest
Presented valuation methodology, stable cash flow documentation, expanding client base evidence, and industry context.
Step 4: Structure Insurance
Each partner insured for 50% of company value, with options for regular increases based on growing market value.
Why This Matters: Protecting Both Business and Families
A properly funded buy-sell agreement serves multiple purposes
For the Surviving Partner
- Guaranteed liquidity: Life insurance provides cash to buy out shares without taking on debt
- Business continuity: Gains full control and can continue operating without disruption
- Clear process: Agreement specifies exactly what happens, reducing uncertainty
For the Deceased Partner's Family
- Fair value: Family receives fair market value for their shares
- Tax efficiency: CDA credits allow for tax-free distribution
- Liquidity: Cash available immediately, not tied up in business
For the Business
- Stability: Operations can continue without interruption
- Protection: Business protected from financial impact of partner's death
- Growth: Can continue growing under surviving partner's leadership
Key Takeaways
What this case study demonstrates
Buy-Sell Agreements Are Essential
Without a clear agreement defining valuation and transfer mechanisms, both business continuity and family interests are at risk.
Valuation Methods Matter
For knowledge-based companies, future cash flow projections provide a more appropriate valuation than asset-based approaches.
Life Insurance Provides Liquidity
Unlike relying on business cash flow or securing financing, life insurance provides cash exactly when it's needed.
Protect Your Partnership
If you're in a business partnership without a buy-sell agreement, or if your business value resides primarily in knowledge and expertise, consider discussing your situation with your lawyer, CPA, and insurance advisor.
Important Disclosure
This case study is illustrative only and not a substitute for professional advice. All client names, company names, and specific identifying details have been changed to protect confidentiality. This is an illustrative example of process and approach, not a guarantee of outcomes.
Every situation is unique. Valuation methods, insurance structures, and agreement terms depend on many factors including business type, corporate structure, partner relationships, and legal considerations. What worked in this case may not be appropriate for your circumstances.
Insurance is offered through iAssure Inc. Insurance products and related services are provided through iAssure Inc., an independent firm in the insurance of persons and in the group insurance of persons. These activities are neither the business nor the responsibility of WhiteHaven Securities Inc.