Often Overlooked In A Buy-Sell Agreement – The Disabiltiy Buy-Out Provision

Agreement To Sell Business Concept

A buy-sell agreement is a legally binding contract which protects the interests
of the company’s owners and permits the business to continue in the event of certain contingencies such as death or disability.  Note other “what if” events
are included in a properly drafted buy-sell agreement and aid in the proper division or dissolution of the company.

These agreements will take into account the death of a business owner and
are funded with some life insurance, however, most overlook the impact of a permanent 
disability on a partner or shareholder of the business even though
it is a basic clause included in a buy-sell agreement.

Many totally ignore the serious financial drain on the business entity should an owner become totally disabled.  A disability is often poorly defined (if at all), not funded or underfunded.  A disabled owner would expect his or her salary to continue and expect to receive ongoing profits from the business.  If the disability is extended, how long could the business keep paying a salary and a share of the profits and what financial impact would it have on the business going forward?

All of these decisions and concerns should be established before the death or onset of a permanent disability and outlined in the agreement.  It should be a business decision based on previously agreed-upon terms, not on emotions or dwindling financial resources.  And, of course, the disability agreement needs to be fully funded with specific disability buy-out policies.  Unfortunately, this is often
not addressed and I want to change this.   

Cross-Purchase Agreement: Where each owner, partner, shareholder agrees to purchase policies on the death or disabled co-owner, partner or shareholder’s interest in the business, which the death or permanent disability triggers the agreement.  They would receive
the proceeds and now have a funding source to complete the buy-out.  Generally used where two owners are involved.

Entity-Purchase Agreement: Similar to a cross-purchase agreement, this agreement designates the business entity as both the owner
and the beneficiary of the life or disability policy proceeds.  Generally used where there are more than two owners.

Disability Buy-Out Funding Options: The trigger date for a total disability is the day following the expiration of the elimination period usually 365, 540 or 720 days.  Policies can pay out in a lump sum, monthly installments or a combination of both.  Money makes the difference for all parties involved. 

         Here Are Some Basic Questions:

(1) Have you reviewed your buy-sell agreement?

(2) Does the agreement protect you during both planned and unplanned events such as disability, death, retirement, divorce, and termination?

(3) Does the agreement specify a mandatory buy-out if an owner becomes disabled or dies? Keep in mind that if it doesn’t,
there may not be a buyer for his or her shares.

(4) Is the agreement properly funded with both life and disability buy-out insurance?

(5) Make sure the provisions in the agreement and insurance policy terms are consistent.

(6) Make sure the agreement lists the disability buy-out and life insurance policies to quickly identify them.

(7) Do you know the value of your business?  Are you comfortable that it reflects the fair market value?

(8) What purchase price is listed in the agreement?  Does it align with the current value of your business and the amount
of insurance you have?

Marc Maretsky Personal Insurance Services based in Beverly Hills, serves all of California and the United States.  I help my clients acquire life, disability, long-term care, and critical illness insured solutions, as well as enroll them into Medicare when eligible.

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