There are many closely held businesses in the United States, and frequently in our meetings with them, we find
that there has been little, if any, succession planning. There are many reasons why, and it usually boils down
the day-to-day running of the business. The business owner is more concerned with the here and now, for example,
payroll, sales, competition, market share, customer service and the list could go on and on. We also find that
when planning has been done, it may be incomplete. For instance, there is a Business Continuation (Buy-Sell)
agreement in place, but it is from years ago, and has never been updated, or it was never funded. This can create
a wide range of problems ranging from business valuations that are no longer accurate, to participants who are no
longer with the company, or in the case of a plan that was not funded, there may not be enough liquidity to fulfill
the terms of the agreement. In this last case, the agreement may have created bigger problems than it solved.
An area that is very rarely addressed is that of the disability of an owner. In creating a business succession
plan, the death of a business owner is usually taken into account, but rarely is the disability of a business
owner addressed. According to insurance studies, at any age, the risk of disability is greater than the risk of
death. A surprising fact is that, at every age, the risk of disability is greater from an illness, than it is
from an injury. (based on 1980 CSO Table and 1985 CIDA Table) This creates a whole new area of risk, since it
can result in a double expense to the business. Lacking an agreement, the owner may still receive a salary. If
the owner was active in management, a replacement would have to be found, resulting in even greater expense to the
One way to avoid this is to fund a Buy-Sell agreement for disability. Thus, the other parties to the agreement
would buy the business from the owner, using disability insurance to provide the funds, in the event of his
disability. Some very important questions should be answered before the problem arises:
1. What is the definition of disability?
2. How long should the owner be disabled before payment is made?
3. How and when will the business be valued?
4. Is the buy-out to be in a lump or as a stream of income?
When you mix a family business into this, it can become even more complicated than a "simple" business relationship.
For example if two brothers are in business together, and one becomes disabled some questions to the
non-disabled brother might be:
1. Will you continue to pay him?
2. For how long? Six months? One year? Five years?
3. What if he never returns to work?
4. Will you hire a replacement?
5. What will his family have to say about this?