A stake in a business partnership is an amazing asset, but one that comes with responsibilities. What if you or a partner suddenly can’t work due to a disability? It usually makes sense for all parties to have an insurance-funded buy-sell agreement.
If there is not a buy-sell agreement in place funded by an insurance policy and the partners can’t afford to purchase the equity then you’ll likely have to look for buyers on the open market.Will you end up getting what your portion of the business is worth? Making sure the funds required to perform such a buyout are available takes planning.
The Benefits of a Buy-Sell Agreement
The odds of a death or disability occurring in a long-term partnership are surprisingly high. One in four twenty-year-olds will become disabled before they retire.
Partners plan for this scenario by entering into buy-sell agreements; that if a co-owner is unable to continue the others will purchase the remaining part of the business.
The benefits of a buy-sell agreement include:
Guaranteeing that the fair cash value of a disabled partner’s interest can be raised.
Keeping control of the business in the hands of remaining partners, not ceding it to third parties.
Allowing the interests of the remaining partners and family of the disabled partner to remain separate.
Ways of Funding Your Practice’s Buy-Sell Agreement
Funding the buy-sell involves pondering scenarios in which owners might find themselves unable to continue and taking out the following policies to cover those situations:
Life insurance to cover death.
Long-term disability for an illness or injury.
Buy-sell purchase agreements are typically funded in one of two ways:
Entity Purchase: The partnership takes out a policy on each co-owner, pays the premiums, and receives the benefit, which is then paid to the departing owner.
Cross Purchase: Every partner takes out a policy each of the others, pays the premiums out of his own pocket, and personally receives the benefit, which is then paid to the departing owner.
Disability Considerations for Buy-Sell Agreements
Pairing disability insurance with your buy-sell agreement provides the funds to allow your company to buy her share of the business.
The disability policy is separate from the buy-sell agreement. Although the insurance company is responsible for making payments to policy beneficiaries in both entity and cross purchases, payments are not made directly to the disabled party.
Certain provisions of the disability insurance policy should match those of the buy-sell agreement. This includes the definition of “total disability” as well as the length of the elimination period, the length of time a disability must last before the co-owner is eligible to receive benefits.
If you found this article helpful, may we suggest:
For more on protecting against disability, read The Importance of Choosing the Right Disability Insurance Company.
For more on practicing medicine in Texas, read Texas Ranks in Top 5 Best States for Physicians to Practice.
For more on defending your practice against unexpected events, read Protect Your Practice With Business Overhead Expense Insurance.