Disability Buy-Out
Protecting Your Share Of The Business
by Gary Fegan

Business owners who have partners involved in the business must take a break from the daily running of their business to plan for certain possibilities. A long term disability suffered by a business partner had the ability to cripple a business. And, a poorly written disability buy-out agreement on the other hand, may severely disrupt a business at the worst possible time. You have a share in your business, and you deserve to be compensated for your share of the business should a disability prevent you from working any longer. The same is true for your partners, but have you ever looked closely at your existing buy-sell agreement? Is there a provision for disability? Does it lock you into buying out your partner’s shares, and is there a maximum dollar amount in the agreement?

You must make absolutely certain that funding the buy-out is realistic and possible for the business should you or your partner become totally disabled. We have seen too many plans that value a partner’s share based on a number from 10 years ago, that was funded with insurance, and today’s valuation would put the business out of business if the partner was disabled.

If you do not have a buy sell agreement funded with insurance to deal with this possibility, there would be a huge burden placed on everyone involved- partners, family and self. If you become disabled and cannot work or contribute to the company and your share of the business is $600,000, how is your partner going to pay you for your share of the business? Your share can be as low as $50,000 or as high as one can imagine. It is imperative to plan for this. You do not want to use business profits or personal savings to buy out the disabled partner!

In the event of a disability, the company, or its remaining and healthy partners, would need to buy out the disabled partner for his or her share of the company. This would take place after the partner has been disabled for a significant period of time, or is permanently disabled. The period of time before the policy and buy out would kick in, or trigger, is usually a minimum of one year. You can extend your elimination, or waiting, period to an 18 or 24-month waiting period.

The disability buy out policy is a great way to leverage your company dollar. If you became disabled and the partners were going to buy you out, and your share of the company was worth $600,000, where would the money come from? The most efficient way to fund this is through the disability policy – which may amount to pennies on the dollar to fund the obligation. The buy out can be paid in one lump sum or monthly over a period of time- one to five years.

It is important when funding the agreement with a disability buy-out policy to factor in the future growth of your company and add a future purchase option rider to your policy. This rider will allow you to add benefit to your policy based solely on the value of your company, and without regard to your health status at that time.

It is also imperative to have a buy sell agreement drafted by a professional that spells out the valuation process for the business and all other details of a buy out in the event of death, disability, termination, or voluntary departure. I would consult your business advisers- accountant and attorney on all these issues. Please do not put this off. We have seen many times where business owners procrastinate, and then it is too late. One of the owners suffers an illness or is in an accident. Then everyone scrambles to find a solution to the buy out need that has been created. The option to use insurance is gone, and the company must use its reserves, profits, and/ or personal assets to buy out the disabled partner. This could bankrupt the company that everyone worked so hard to build. Do not let this happen to you. Call your advisors as soon as you can to get this process started.
To get a quote and further information, you can go to disabilityquotes.com.