If you are a small business owner and have a partner, you may have agreements about what will happen to business ownership should one of you die or voluntarily leave. A buy-sell agreement should address these events and should also include the possibility of an owner’s major disability.
Put It In Writing
In the buy-sell agreement or in a separate agreement, clearly define qualifying disabilities that would trigger a buyout, and the parties who get right of first refusal to buy the disabled owner’s share of ownership. This document should detail what would trigger mandatory and optional buyouts.
Next, explore funding options for buying the disabled owner’s share of the business. You might make regular installment payments taken from profits or investments put aside for this possibility, which could be a problem if either experiences difficulties. Or you could buy cash value life insurance on all the owners, with the business named as beneficiary, directing cash value to the business in the event of a qualifying disability.
Many agreements are funded by including long-term disability income insurance, which the business would buy on all partners. Talk to your tax, insurance and legal professionals to learn more.