Buy-sell funding gap calculator
The calculator compares the price of a buy-sell purchase with the life insurance and cash set aside to pay it. It shows any unfunded balance and a yearly payment, all built from the reader's own numbers.
Run the numbers
Example values are filled in. Replace them with your own figures.
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What the calculator shows
A buy-sell agreement sets up the purchase of an owner's stake after a triggering event such as death. The calculator puts the price of that purchase beside the money already lined up for the payout. The gap between the two is the figure that matters most to the surviving owners.
Two sources of funds appear in the comparison. Life insurance payable to the buyer arrives as a lump sum at death, while cash reserved for the purchase is money held in the buyer's own accounts. Both come off the price first, which leaves the remaining balance.
Every figure comes from the reader's own entries. The valuation discount is a placeholder, because in real life the price is set by the agreement itself or by an appraisal. The result is an education illustration and not a quote of any actual price.
How the arithmetic works
The price starts with the business value. That value is multiplied by the ownership percentage being bought, which gives the share of the business changing hands. The result is then multiplied by one minus the valuation discount, which gives the price.
Next the life insurance payable to the buyer and the cash reserved are both subtracted from the price. What remains is the unfunded balance, and it never drops below zero. A fully funded purchase therefore shows a balance of zero, and extra insurance or cash does not create a negative figure.
The yearly payment divides the unfunded balance by the years allowed to pay, with the years never counted as less than one. Interest is left out, so the payment shown is the balance spread evenly and nothing more. A real payment plan with interest would cost more each year.
How to read the result
A balance of zero means the price is fully covered by the insurance and cash entered. A positive balance is the part of the price with no money behind it. The size of that balance relative to the price shows how much of the purchase depends on later payments.
The yearly payment turns the balance into a recurring burden on the buyer. A small payment against the buyer's income may be easy to absorb, while a large one may strain the business. The calculator cannot see income, so that comparison stays with the reader.
Changing one input at a time shows which lever moves the result most. A higher discount lowers the price, while higher insurance lowers only the balance. Comparing the two movements builds a feel for the structure of the funding.
Where owners get surprised
Insurance amounts set long ago often sit far below the current price. A business that has grown leaves the old policy covering a smaller share than the owner remembers. The calculator makes that shortfall visible as a balance.
The valuation in the agreement may follow a formula, a fixed number or an appraisal, and each can land far from what the owner expects. The gap can swing in either direction.
Cash reserved for a purchase is also wanted for operations, taxes and payroll, so the same dollars can be spent on two jobs. Payments over time bring interest and the risk that the buyer's business slows, neither of which is built into the arithmetic. Ownership of the policy, who pays premiums and who receives the proceeds all change how the money actually flows, and tax treatment varies by situation and changes over time.
Common questions
Why is the valuation discount only a placeholder?
In a real buy-sell the price comes from a formula in the agreement or from an appraisal, not from a slider. The discount lets the reader see how a lower or higher price changes the balance. Any actual discount depends on the agreement's own wording.
Does the calculator include interest on the unfunded balance?
No, the yearly payment is the balance divided by the years allowed, before interest. A real payment arrangement with interest would add cost to each payment. The result is a starting point for comparison and not a forecast.
What happens when insurance and cash exceed the price?
The unfunded balance stops at zero, because it never drops below that point. The extra money does not appear as a negative number or as a surplus. The yearly payment then shows zero.