Buy Sell Agreement Funding (Disability Insurance) – PART 1
Posted In: Business Succession & Estate Planning

In our previous post, we discussed how to purchase the shares off the estate of a recently deceased partner, allowing you to avoid being in business with your former partner’s spouse. The reason for this is that they most likely would’ve had no involvement in your business before, and wouldn’t be able to add any value in this situation. (You can read the previous post here here).

In this post, we’ll explain the importance of a Buy Sell Agreement in situations where your business partner becomes injured or ill, and can’t return to work. A Buy Sell Agreement is essential to you and your business partners. It’s as important as having customers, a marketing strategy and an income. If you have silent investors to whom you pay yearly dividends, you’ll understand what it feels like to give away your hard earned cash to someone who didn’t really work for it.

Now, think of your business partner. If they weren’t able to work, you’d likely still be paying them a salary. (With any luck, you’d have planned ahead for such a circumstance and your partner’s disability insurance would’ve kicked in). What would happen, however, if your partner’s health wasn’t improving after a year or two, and it was unlikely that they’d return to work in any capacity for a while?

Most likely, your business would slow down without them there. In such a case, the thought of getting a second mortgage to buy out their shares certainly doesn’t sit well. Splitting profits with your business partner that they didn’t contribute to probably doesn’t either.

First, let’s think about your business partner. Would they be OK if you bought them out? The answer is almost certainly YES. They would continue to receive their long-term, monthly disability checks, and they’d probably want a lump sum payout of the business, instead of a yearly dividend. The lump sum payout would help put their family at ease, and they’d have some cash to fall back on.

This is where Disability Buyout Insurance comes in. Unlike typical disability insurance where an income is paid out on an ongoing basis, Disability Buyout Insurance pays a onetime, tax-free lump sum. This lump sum covers approximately eighty-five percent of the value of your partner’s shares, and you can pre-select the trigger date, much like you would in your shareholder’s agreement. Normally, we’d see a twelve month, an eighteen month, or a twenty-four month clause that would trigger the buyout and fund the purchase. At this point, your partner may or may not be showing signs of improving health-wise.

The bottom line is that Disability Buyout Insurance offers peace-of-mind by allowing you to get a controlling share of your company, to help your friend and business partner, and to help their family focus on recovery without financial worries.

(Continue reading Part 2 here)