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Small Business Continuity Planning: Have You Safeguarded YOUR Business?

Photo of author, David Wilcox II, CPWA®.
David Wilcox II, CPWA®
Associate Financial Strategist

If you are a business owner, you likely have more than a few things that keep you up at night. My apologies in advance for adding another “log on the fire,” but consider the following question:

If you or a business partner die or become disabled, what happens next to your business?


Did you have to think long and hard to answer this question? If so, you aren’t alone. It is estimated that 75% of business owners do not have a documented succession plan specifying what occurs if an owner or employee in a senior role dies or becomes disabled. Having a formal agreement that specifies the exit strategy for an affected partner prior to a triggering event allows business owners to know what course of action to take up front. This also may prevent costly legal fees and animosity between owners in the future. Two of the most common vehicles used in business succession planning are buy-sell agreements, and disability overhead insurance.

What is a Buy-Sell Agreement?

Buy-sell agreements come in several types, but the premise is the same for all — defining how a partner’s share of a business will be divided if a triggering event occurs. These triggering events are often referred to as the five D’s: death, disability, departure, divorce, and disqualification (i.e., requirement to remove an owner due to regulatory or legal ruling).

The two most common types of buy-sell agreements are Cross-purchase and Redemption agreements. Cross-purchase Agreements define how the remaining owners purchase the shares of the business that are for sale due to a triggering event of the selling owner. In a Redemption Agreement, the entity buys back the shares of the business without allocating a greater percentage of ownership to the remaining owners. A hybrid agreement can also be used to allocate a fraction of additional ownership, and the remainder bought by the entity.

The use of a buy-sell agreement typically requires each owner to purchase life and/or disability income insurance on the lives of the other owners. In the event of the death of an owner, a lump sum is immediately available to fund the buyout of that owner. If a disability occurs, the buyout is usually completed only after the disabled partner has been totally disabled for a period, commonly one year.

If multiple owners are involved, this type of plan can get very complex. To simplify the agreement, a trust can own one policy on each business owner and then represent the other owners in the transaction if a triggering event occurs.

How do I protect the business itself and my employees?

A buy-sell agreement covers the owners, but what about the business itself and its employees? If a key person in a business becomes disabled, especially a small business that has one or two highly skilled “rainmakers,” keeping the business cash flow positive can be difficult or nearly impossible. Rents, utilities, and salaries must be paid whether the owner has been sidelined by a disability or not. One viable option is to purchase disability overhead insurance (aka business overhead insurance). This coverage ensures that the business can continue to function even if the owner cannot.

Disability overhead insurance pays out a stream of income to the business if the owner becomes disabled and cannot work. The business can then use the funds to meet its expenses, and if needed, hire a temporary or permanent replacement to act in the disabled owner’s capacity.

Enacting a properly executed business succession plan is crucial to the long-term stability of any small business. To learn more, check out this video, Creating a Business Succession Plan. If you feel like there are disparities in the continuity of YOUR business, give us a call. We would be happy to help you explore continuity planning and determine a plan that is right for your small business.

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