Defensible valuations that size key person and buy-sell insurance cover to real equity value.

A key person insurance valuation is an independent report that establishes a business's market value and quantifies how much of its earnings depend on one individual, so the sum insured for life, TPD or buy-sell cover is set against evidence rather than a salary multiple. Prismi prepares these senior-reviewed reports for insurance advisers, accountants and lawyers to size cover, fund buy-sell agreements and document the number behind the policy.

When a key person or buy-sell valuation is required

A key person or buy-sell valuation is required whenever a buy-sell agreement is drafted or funded, key person cover is proposed and the sum insured needs justification, a lender or insurer asks for financial substantiation of a large policy, a partner is admitted or exits, or existing cover was set on a stale value and the business has since grown, taken on debt or changed hands. Most key person and buy-sell cover in Australian private businesses is instead set by rules of thumb — a multiple of salary, a round number the partners agreed years ago, or whatever premium felt affordable at the time — and none of those figures is evidence of what the cover actually needs to fund. The valuation is prepared to the market value standard — IVS 102, consistent with the Spencer v Commonwealth (1907) formulation — so the deed and the policy are anchored to the same defensible number.

Quantifying the key person: with-and-without analysis

The earnings-based measure of key person exposure is a with-and-without analysis. We establish the business's future maintainable earnings with the key person in place, then model the earnings without them — accounting for revenue attributable to their relationships and technical capability, pipeline they control, management depth and delegation, the realistic recruitment and handover period, and the cost of a replacement at market remuneration. The difference, assessed over a defensible recovery period, is the quantified contribution of that person to maintainable earnings. The evidence behind it matters: revenue attribution by relationship, client concentration tied to the individual, employment terms and any restraint clauses, and organisational-chart depth all go into the working file. A salary multiple ignores every one of those factors, which is why cover set that way is so often wrong in both directions.

Sum-sufficiency: three different needs, three different numbers

Cover fails when three distinct funding needs are conflated into one round-number policy. Equity funding for a buy-sell requires the market value of the departing owner's specific interest — including any class rights, and with discount or premium considerations documented. Debt protection requires the guaranteed facilities and obligations that fall due or must be retired on the trigger event. Revenue replacement requires the with-and-without earnings shortfall over the recovery period, plus replacement and transition costs. These are different measurements answering different questions, and they rarely produce the same figure. Our report states each measure separately, with the methodology and evidence for each, so your licensed adviser can structure the cover — ownership, policy type and amounts — against numbers that hold up rather than one blended guess.

Alignment with the buy-sell agreement

A buy-sell deed is only as good as the value its trigger clauses operate on. Deeds that fix a dollar value go stale the year after signing. Deeds that use a formula inherit every distortion in the formula. Deeds that call for an independent valuation at the trigger event work — provided the parties have a current sense of value beforehand, because that is what the cover was sized against. The funding shortfall risk is concrete: if equity value has grown past the sum insured, the continuing owners must fund the gap personally or the outgoing estate accepts less than market value, which is precisely the dispute the deed existed to prevent. We prepare the valuation the deed's mechanism can operate on, aligned to the trigger events it defines — death, total and permanent disablement, trauma or voluntary exit — and we flag where the current cover and the current supportable range have diverged. Whether the deed's drafting matches is a question for the lawyers; our report gives them the evidence to check it against.

Revaluation triggers

Key person and buy-sell cover should be revalued whenever one of these events occurs, rather than left to run on the figure set at the last policy renewal.

• ·Material growth or decline in maintainable earnings since the last valuation
• ·New or refinanced debt, particularly facilities carrying personal guarantees
• ·Admission, exit or death of a partner, shareholder or unit holder
• ·A major client win or loss, or a change in key contracts
• ·Acquisition, restructure or new entities added to the group
• ·Changes to the buy-sell deed or the policies funding it
• ·Policy review or renewal cycles — as a working rule, review annually and revalue every two to three years or on any trigger above

Tier recommendation

Most key person and buy-sell funding valuations sit at the Comprehensive tier (from $3,995 + GST, 15–25 business days), which covers the with-and-without analysis and the sum-sufficiency measures advisers need. Straightforward single-entity matters where cover is modest may suit the Essential tier (from $1,495 + GST, 10–14 business days). Where the deed is being drafted or renegotiated, ownership is multi-entity, or the parties disagree on value, the Defensible Valuation File (from $8,995 + GST, 25–35 business days) is the right level. Additional entities are $750 each; fees are fixed at engagement and never contingent on the outcome.

Valuation evidence — not insurance or financial advice

Prismi prepares independent valuation evidence only, not insurance or financial product advice. We do not hold an Australian financial services licence, we do not recommend insurance products, sums insured, policy ownership structures or premium funding, and we do not advise on the tax treatment of premiums or proceeds. Those decisions belong with your licensed financial adviser, your accountant and your lawyer. What we provide is the piece the guesswork usually replaces: an independent, senior-reviewer-signed market valuation with a documented supportable range, prepared in accordance with APES 225, that the licensed advisers can build the cover and the deed around. The working file is retained for 10 years.