Keeping Your Small Business in Business Through a Disability | Virginia Benefit Advisors

If you own a business, you know how it feels to live for that business. You also rely on it to support you and your family. So, what would happen if you suddenly became ill or injured and could no longer work? You need to think about the what-ifs.

The fact is, your loved ones may not have the skills or desire to run the business, and your co-owners may not welcome the idea of an unintended partner. Also, imagine the scenario where it is one of your co-owners who becomes permanently disabled and you’re faced with those choices.

That’s where a disability buy-sell plan comes in to play. This is an agreement among owners to buy out a co-owner’s share of the business in the event of a permanent disability. Here are four options for funding that agreement:

1. Cash method. The business or its owners could accumulate sufficient cash to buy the business interest at an owner’s disability. Unfortunately, it could take many years to save the necessary funds, while the full amount may be needed in just a few months or years.

2. Installments from current earnings method. The purchase price could be paid in installments after an owner’s disability. For the remaining active owners, this could mean a drain on business income for years. In addition, payments to the disabled owner would be dependent on future business performance after the owner’s disability.

Only disability buy-out insurance can guarantee that the cash will be available exactly when needed

3. Loan method. Assuming that the business could obtain a business loan after an owner’s disability, borrowing the purchase price requires that future business income be used to repay the loan plus interest.

4. Insured method. Only disability buy-out insurance can guarantee that the cash needed to complete the sale, through either a single sum or installment purchase, will be available exactly when needed, assuming that the business has been accurately valued.

For many businesses, the best solution to the problems arising from the permanent disability of an owner is to use the proceeds from disability buy-out insurance to purchase the disabled owner’s share of the business for its fair market value.

By Bill O’Quin
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