Nobody likes to think about it, but what happens to you, and your company, when you become disabled?
100% of owners of small companies eventually exit the company in one way or another. But even when small business owners do plan for contingencies with their business, most think about death or retirement—few think about how they will handle a disability.
Some statistics suggest that on average, one in four persons will experience a disability before they retire. Often, these disabilities will last for more than three months. Some statistics indicate that one in eight people will incur a disability that will last for more than 5 years.
Planning for a death can often be relatively simple because one can obtain life insurance as a financial vehicle to address the death of a business partner or themselves. This does become more challenging when an owner or business partner is uninsurable, or the insurance is expensive, but there are often ways to handle these situations that are fairly straightforward.
What is more problematic is addressing a disability. First, like with a death, there are initial concerns such as the immediate handling of business affairs when a disability strikes. But second, there are additional concerns related to the length of disability, preservation of the business for when disability ends, liquidity of funds to purchase a business interest, personal and business income during disability, decision making responsibilities during disability, and so on.
While obtaining a good disability insurance policy can address some of the concerns, and having good health insurance can help, a business owner of a closely held company has additional considerations. These include, but are not limited to, such considerations as the following:
- will the company have any value when they come back;
- how will the disabled owner’s family be affected;
- who can make decisions for disabled partners about the business during the disability if the partner is impaired;
- who can access the key documents and information regarding the company in an emergency;
- how restricted are the remaining business partners in the company in making decisions while the disabled partner is disabled;
- can the business continue to generate revenue without the disabled partner, how;
- should business partners be required to preserve the value of the disabled partner’s interests in the company, keep the job open, and for how long;
- can the company stop paying the disabled owner/employee since they are no longer working;
- should the company pay any distributions/dividends from the company even if the owner/employee is no longer working in the company, and for how long;
- how long does a business partner have to wait before they can get another partner or sell their own interest; and,
- can the disabled business partner’s family sell the disabled partners’ interest in the business to obtain cash for long term care.
There are many different scenarios, and many different ways to address these concerns, but they require attention and intention. The tragedy of a disability does not have to be compounded by a lack of preparation. One can consider these issues, and take steps to be ready so the hard work of building a business income is not destroyed by an accident.
But beyond this, planning for a disability has added benefits. It forces owners and companies to address their fundamental values, goals, and purposes. Is it income? Is it taking care of customers? Is it taking care of employees or business partners? Is it being able to follow through on commitments? The necessary organization of a business to address disability concerns gets the owner to treat the business as it really is, a separate entity, potentially capable of surviving and even thriving without the owner’s constant attention and time. Imagine if you could take yourself out of the company, without having to be disabled, and still reap the benefits of the company’s existence. This is certainly a goal most owners should consider pursing, whether or not they have to actually face a disability someday.