No one likes to think about becoming disabled due to illness or injury. However, the numbers make it clear that disability is a fact of life for millions. The 2010 U.S. Census found that approximately 19 percent of the population, or 56.7 million people, had a disability, and more than half of them report a severe disability.
When you own a business or an interest in a business, and are unable to work, you and many other people are impacted – family, business partners, and employees. If you are unable to run your business any longer, what will happen to it? Business partners can carry the additional workload for a short period of time, but something must be settled quickly and especially if you become permanently disabled.
Planning for contingencies and business continuation when events could threaten business sustainability is smart business planning. The goal is to ensure orderly business succession, and one of the smartest strategies is to establish a Buy Sell agreement that is funded by insurance. This type of agreement offers two benefits should you become disabled or die. First, it enables the remaining business owners to assume your interest in the business. Second, it ensures your family receives fair financial compensation for your interest.
The Buy Sell agreement has two parts. One is the transfer agreement which outlines what happens to each owner’s business interests in the event you (or any owner) is disabled or dies and how the interests are valued. The second part funds the transfer of the interest, and there are several options.
• Cash – The remaining business owners can simply cash out your business interest. This is a good option only if the owners have access to their own cash. If the business has been successful, the amount needed can be substantial.
• Personal Loan – This is a form of cash out but the owners borrow the money to buy out your interest. It is an expensive way to buy out your business interest because it means taking out a personal loan and paying interest out of pocket.
• Business Loan – The business could take out a loan to buy you out, but that means the business is committing to principal and interest payments from future business income.
• Installments from Current Earnings – The business could make installment payments, but both you and the business are assuming high risk. You only get your money if the business continues to be a going concern. In addition, the payment is an ongoing liability for the business.
• Insurance – Disability buy-out insurance is usually considered the most efficient, reliable, and affordable method of ensuring the money is available should a business owner become disable. The insurance amount is based on the business value and can pay out as a lump sum or installment purchase.
Leave Nothing to Chance
When a business owner has put heart and soul into building a successful enterprise, it does not make sense to leave anything to chance. No one plans on disability, but life can throw curves with no notice. Being fully insured is important and gives you, your partners, and your family peace of mind.
Illustrative business plan samples
OGSCapital’s team has assisted thousands of entrepreneurs with top-rate business plan development, consultancy and analysis. They’ve helped thousands of SME owners secure more than $1.5 billion in funding, and they can do the same for you.