29 Aug Safety for Business Partnerships: Buy-Sell Agreements & Disability Insurance
The Shoemaker’s Kids Have No Shoes
Last week I was talking with my friend, Derrick, who runs a successful family insurance brokerage. Derrick told me a harrowing story about when his father was running the business.
Derrick’s father, Brent, had started the family business decades ago and had two business partners. One of his partners, Sylvan, taught defensive driving in the evenings at a local high school not far from the office.
One evening, Brent received a frantic phone call from the school where Sylvan was teaching. One of the students told him that Sylvan was unconscious and bleeding from his mouth.
Brent leapt to action, and adrenaline took over.
Brent rushed to the school where Sylvan was teaching. Thankfully, the school was only a few minutes away, and Brent was by Sylvan’s side within minutes.
With Brent’s quick thinking and the fast action of the students, they were able to get Sylvan to the hospital via ambulance.
The doctors said Sylvan had suffered a ruptured aorta – a deadly serious condition where blood coming from the heart through the largest artery in the body, the aorta, bursts through the artery wall and flows into the rest of the body.
It’s basically a death sentence – almost 90% of people who get this condition die from it while in the hospital, and almost 70% die before even reaching the hospital.[i]
Miraculously, the doctors were able to save and stabilize Sylvan. He had a lengthy stay in the hospital ahead of him, but he was lucky to be alive.
Crisis Averted – Or Was It?
But Sylvan had a very long road back ahead of him. Sylvan was unable to work for over a year after the incident.
Doctors ordered him to stay away from any stressful activities while he recovered. That meant he had little to no interaction with his partners or work for over a year after he was in the hospital.
Sylvan went through extensive rehab and occupational therapy. His medical care and rehab costs spiraled well over $200k.
How was he (and the company) supposed to pay for all this? Fortunately, the buy-sell agreement had a disability insurance provision in it. The language stated that the company could purchase disability insurance to help the company and the business owners in a situation like this.
“There was one big catch,” Derrick said. “They didn’t fund the agreement with disability insurance.”
Let that sink in for a second:
An insurance company,
That advises businesses on all types of risks,
And how to protect themselves from those risks,
Was left bare to this risk (Sylvan’s disability) that could sink the company.
“How could that happen?” I wondered aloud.
“It’s a classic case of the shoemaker’s kids have no shoes,” said Derrick.
Per the buy-out agreement, the company had to come up with the money to pay Sylvan a salary while he was out on disability.
Since Sylvan was already near retirement age, the company eventually arranged a buy-out with Sylvan. That took huge sacrifices by the company, Brent, and the other partner to make it work.
On the Brink
It was a lean few years for the company.
Paying Sylvan his salary and buying him out of the company so he could retire put the company into financial strain for years.
But the company survived.
Most other companies faced with the same situation wouldn’t be so fortunate.
As business owners, what can we learn from this?
The confronting question we all have to ask ourselves is:
Could my company survive if this happened to us?
That’s why funding your buy-sell agreement with disability insurance is so important.
Disability Insurance: A Gaping Liability Hole in Most Businesses
Typically, when we talk about funding a buy-sell agreement, most people assume we mean funding it with life insurance.
And that is critical. You absolutely want to fund it properly with life insurance if you can.
But . . . that’s far from the end of the story.
According to some statistics[ii], you might be over 50% more likely to become disabled than to die during your working life.
What does all this mean?
If you’re looking to truly future-proof your company, you need to look into funding your buy-sell agreement with not only life insurance but also with disability insurance.
Preserve the Stability of Your Business
In the event of your or your partner’s disability, the company’s operations can be significantly disrupted. The owner’s absence might lead to uncertainty, confusion, and a decline in performance.
By integrating disability insurance into your buy-sell agreement, you’re being proactive in facing down this risk.
If a business owner becomes disabled and is unable to contribute to the company’s operations, the disability insurance funds kick in and help fulfill the financial obligations outlined in the buy-sell agreement.
But, for this to happen as intended, it’s critical to have the correct structure in the buy-sell agreement to trigger the insurance.
Not having the two blend together is like a trapeze artist at the height of her swing, reaching out for the other trapeze artist’s hands and there’s no one there to catch her . . . disastrous.
To ensure you do that right, it’s vital that your business attorney and insurance advisor communicate and be on the same page.
Financial Security for Disabled Owners
Without adequate disability coverage, disabled owners are likely facing a precarious situation.
Desperate to raise money, the disabled owner might be forced to sell their stake in the business for pennies on the dollar. This is a bitter pill to swallow when the disabled owner has worked so hard to build the company prior to the illness.
Instead, disability insurance can swoop in and save the day in situations like these. Properly protected, you give you and your partners peace of mind knowing that your company and the disabled partner’s interests are protected.
Protect Your Blindside
As with all unexpected events in life, you don’t get a warning. That means the time to prepare yourself and your business is now.
Schedule a consultation with a business attorney to create a customized buy-sell agreement – one that is properly funded with disability insurance – that suits your partnership’s unique needs.