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Disability
Buy Out
You and your partners have invested heavily in time, money and hard
work to build your business. You've insured its physical plant,
probably your lives and your families' lifestyles with individual
DI. Doesn't it make sense to
take the next step and ensure that
your business can go
on even if one of you can't?
imagine
how difficult running your business would become if one day one of
the major players in your
business was
no longer able to come to work because of
a sickness
or an injury.
Anyone who owns a business or
professional practice knows
how important even crucial each key person's contribution
is, every day. Even an extended vacation or a pressing personal problem
can interfere significantly with the day-to-day operations of a small
company.
But of course a disability has a much more serious impact
than a short absence from the office. In fact, an
unforeseen disability has the potential to complicate your business's
financial picture even more than a death
or a retirement, two events more commonly planned for.
First, since no one can predict whether the disabled person
will be able to return to work-or when-it is almost
impossible to initiate a simple
buy-out, the obvious solution at death or retirement. Plus, since the
person is
still alive and not eligible to begin collecting
retirement funds, he or she needs money. The disabled owner may want to
recover the capital invested in the business as well as replace the
income lost due to the disability.
The whole situation can generate any number of difficult
issues on top of the disability itself, especially in a small,
tightly knit business with only a few employees. However, there is a
workable solution that can help
prevent conflicts and balance everyone's best interests a
disability buy-out agreement.
How Likely Is It That
One of You May Become Disabled?
When you're immersed in the day-to-day details of creating
and
running a small company, you may not think much
about the possibility of becoming
disabled. You're too busy
trying to build your business! However, the truth is
that disability is a very real
possibility. A car accident, a
serious illness, a heart attack even
a back injury can keep you away from work for quite a long time.
Unfortunately, you are not immune from illness or injury
simply because you are vital to the success of a
particular business. Consider the statistics on the subject, which tell
us that in a multi-owner business,
the chances of an owner's becoming disabled for 90 days
or more before age 65 are startlingly high:
•
With two owners, both aged 35,
there is a 34% chance that one will become disabled prior to age 65*
•
With three owners, all aged 35,
there is a 47% chance that one will become disabled*
•
Of all 45-year-olds disabled for
one year, after five more
years:
-
19.9% will have died
-
57.5% will still be disabled**
Resolving Conflicting
Interests
each major party in the business has his or her
own unique
set of
interests and, in fairness, all these conflicting
points of view must be taken into
consideration.
Obviously then, without a well constructed agreement,
the crisis of a key player's disability
could force an otherwise successful business into dissolution.
The
Remaining Owner's Point of View...
If another owner's
disability were to persist for a year or even longer, you might begin to
ask yourself these questions:
•
How long can we afford to
operate without our partner's help?
•
When should we begin to think
about hiring a
replacement?
•
What happens now to the business
loans the bank made us both sign for personally?
•
Will our creditors or customers
begin to lose confidence in the viability of our business?
•
How can we continue to include
our partner in our decisions when he or she can no longer participate in
our operations?
• Will
the spouse or children of the disabled partner want a say in running
things?
• Will
our disabled partner sell his or her interest to a competitor?
The
Disabled Owner's Concerns...
If you've invested in the business, helped it grow and been a major
decision-maker—and have suddenly become
disabled—you might start
thinking:
•
How can I hope to recover my
capital investment?
•
Why should I have to let someone
else run my business, using my money?
•
Where is the return on my money
that I should be receiving, considering I helped found the business?
The
Business's Best Interests...
Because of the importance of each
individual, small businesses often create buy-out plans to anticipate
the
death or retirement of owners or partners.
But, as you can see, it is equally important to set up such a plan to
guard against the effects of disability.
Adequate disability income insurance or a tax-qualified sick-pay plan
can take care of replacing the disabled owner's
income. But in order to finance a buy-out of the
disabled partner's share of the
business, the company must
come up with a great deal of capital. And just
where does that money come from? Most
firms would
find it very difficult to come up with enough after-tax
cash either to set up a reserve fund in advance or to try to pay for the
partner's share after the fact.
* "Why Disability," a publication of the
National Underwriter
** 1985 Commissioners Disability Table
(Statistics shown are based
on data collected from independent disability carriers
and reflect only individuals with DI policies.)
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