When it comes to running a business with multiple partners, it is crucial to have a plan in place for the unfortunate scenarios of partnership dissolution, death, or disability. While death may be the first concern that comes to mind, the truth is that disability can have even more severe consequences for a company.
In the absence of a written plan, the door is left open for new and uninvited partners to enter the picture following any of these events. Many business partners mistakenly believe that only death can cause such complications, but that’s far from the truth.
Disability poses a significant threat to the company. Unlike death, it lacks the definitive resolution that enables closure and effective planning. Disabled owners will have a different mindset, shifting their focus from business growth to survival. They will need a regular income, employee benefits, and potentially a portion of the company’s earnings to meet their financial needs.
A Buy/Sell agreement can address the issue of a disabled owner by compelling them to sell their ownership in exchange for financial compensation. Without insurance coverage, the company will be left to come up with the funds, whether from company savings, a loan, or even resorting to selling the company itself. This last event brings with it the emotional and psychologically painful stress of losing a business that has been passed on to family heirs throughout the ages.
The lack of financial protection through a buy-sell agreement not only puts the business at risk but also jeopardizes the livelihoods of its employees. Uncertainty arising from a disabled company can be exploited by competitors. Without the active and daily involvement of the owner, it’s not surprising that suppliers may also become apprehensive
A sample case that comes to mind can be seen in the case of Kids for Ever Amusement Park, a 75-year-old established business. When one of the two brothers who ran the operation passed away, it was discovered that he had been taking out loans annually to sustain the park during lean times until dues were collected. However, after his passing, the bank decided it was no longer willing to extend the loan without the principal partner’s involvement. Eight months after, the surviving partner succumbed to the financial struggle he faced and was forced to close the amusement park.
Furthermore, the absence of a business owner or a major partner due to disability can quickly destabilize a company. Despite the central owner’s unavailability, bills and expenses must still be paid. Even a relatively small business can accumulate significant monthly expenses, and without any income, these expenses can quickly lead to the company’s downfall. These expenses may include insurance, but are not limited to, rent or mortgage, utilities, licenses, and staff salaries.
While initially, these bills can be covered by company savings, without generating new cash flow, they will eventually be neglected, paid using personal savings, or through the sale of the business, as in the case of the amusement park. As a result, the business will spiral into financial losses.
Business interruption insurance, also known as Loss of Income and/or Rents, commonly included in Businessowners Package Policies, covers situations where the company cannot operate due to external unforeseen factors like windstorms, fire, theft, or vandalism. Here’s a question that needs to be addressed as well: What happens when the reason for not being able to open the doors on Monday morning is due to the absence of the owner or key personnel?
In the realm of disability insurance, it is essential to recognize that the disablement of one person can have a profound impact on the entire business. Businesses can become disabled and require proper protection. It is crucial to have a plan in place, backed by appropriate insurance coverage, to safeguard against partnership dissolution, death, or disability.