Disability – What Would Happen to Your Business?

The Disabled Business Owner

Many, if not most, businesses will suffer financial consequences when one of the owners becomes disabled. In the absence of some prior arrangement to keep the business on a profitable footing, the business itself may become a casualty - particularly when the business is owned by only two people and the work load falls entirely on the healthy owner.

Problems Caused by Disability:

• Healthy owner(s) may have to shoulder the work load, usually without extra compensation
• Additional staff may have to be hired
• Creditors and customers may lose confidence
• It would be difficult to make major decisions
• Disabled owner’s spouse or public trustee may become involved
• Disabled owner may have financial difficulties which would affect the business

The Choices the Owners Must Make:

1. Do nothing

• Chances are the owners will go through a long period of indecision, frustration, business problems, financial problems and possibly legal action over disagreements

2. Dissolve the business

• May mean an immediate full or partial investment loss

3. Buy out the disabled owner’s share

• Seller may have to agree to a depressed purchase price and may have to accept installment payments spread over several years
• Purchaser must pay the purchase price using 100 cent dollars

Where Will the Money Come From?

1. Borrow the money

• Will credit be readily available and will the business have adequate cash flow?
• What would be the cost?

2. Appropriately designed disability income insurance

Advantages of Disability Income Insurance

• An insured, disability income continuance plan is relatively inexpensive and certain
• It replaces a potentially costly and unproductive drain on business assets with a known business expense
• Suppliers and creditors will be reassured because they know that the business owners have had the foresight to plan, and thus avoid a problem that has ruined many businesses
• It demonstrates sound business management and helps attract better quality employees
• It can protect key people in addition to owners, thus improving employee relations and morale

What Are Your Odds?

When two or more individuals are co-owners in a business, the probability that at least one of them will become disabled is much greater than for a sole proprietor.

At age 35, for example, the risk of disability over the next 30 years is 68 percent for the single owner, but jumps to 90 percent for two co-owners, all age 35.

The following table of odds, based on 1964 Commissioners’ Disability Table (U.S.A.), gives the odds that one of the co-owners will be totally disabled three months or more before reaching age 65.

Odds of at Least One Prolonged Disability Before Age 65
(Expressed as Number of Chances out of 100)

Why Business Owners Have Different Disability Planning Needs

• Cash flow requirements much larger
• Personally responsible for success or failure of business
• Often key revenue generator(s) of the business
• Skills or contracts difficult to replace
• Vested interest in business’s long-term success

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