Can Your Company Survive Your Short-Term Absence?
The disability of a small business owner can be successfully addressed.

By Rick Welsh

As an owner of a small business, you are the true lifeblood of the organization. All phases of the business—from generating the revenue on the top line, to production, to management of fixed expenses—rest primarily, if not solely, in your  hands. Now, consider this question carefully: If an accident or injury were to disable you for a period of time, could your business survive?

Under the Radar
For many small business owners, this issue is not even on their radar screen. Some have chosen to ignore it for the time being, because they do not think it’s a significant threat. But, the reality is that disability of the owner may be the most significant threat facing a small business.

According to a 1985 National Association of Insurance Commissioners (NAIC) report, 18 percent of 40-year-olds will suffer a disability severe enough to make a long-term disability claim before age 65.

Most people are familiar with traditional group or individual disability policies, which provide income replacement for the disabled. This coverage often is a recognized priority for owners and their families, but all too often the planning stops there. What about the business? How will the bills get paid?

Payroll, fixed expenses and debt obligations will all continue to build even if an owner is out of commission. And, revenue generated through the efforts and relationships of the owner surely will be down dramatically. If it fails to meet its obligations, the business might face the prospect of closing the doors or a hasty sale.

Looking at Options
Small business owners do have options when it comes to managing the risks of disability.

But too many small businesses are relying on a bad option: self-insuring the risk. This option means pumping additional personal savings to help sustain the business (assuming the owner’s entire life savings isn’t already invested in the business). This is generally not a good situation when expenses at home are increased, and income decreased, due to a disability.

A better solution for the business is purchasing “key person” and “business overhead expense” disability insurance.
Disability coverage is especially critical for small business owners who have invested a substantial portion of their net worth, or taken out a loan to fund the business. From a risk management perspective, these owners essentially have  all of their financial eggs in one basket. With a potential risk to that basket which is not at all uncommon,  disability coverage is an expense owners can’t afford NOT to take on.

How You’re Protected
A business overhead expense policy reimburses the business with short-term benefits to cover fixed operating expenses such as rent, utilities, salaries and general office expenses. The owner provides an itemized list of such expenses and the appropriate coverage amount is determined. Benefits are normally payable for periods up to 24 months, giving the owner sufficient time to return to work, negotiate a sale with more advantageous terms, or make other arrangements. The cost of coverage is generally deductible to the business, and is usually very affordable as it only provides benefits for a relatively short period of time.

Partners Can’t Do It Alone
In small business, partnerships are just as common as sole proprietorships. A common misconception in dealing with the disability issue in a partnership is that one partner will be there to pick up the slack if another were to be sidelined for a period of time. But the reality is often quite different. Most small business owners already are working more than 40 hours a week. While your partner would probably do everything possible for the business, no one can do the work of two entrepreneurs for a sustained period of time. Factor in additional financial pressures, and you have a recipe for conflict and failure.

Include Disability In Buy/Sell Agreements
Finally, businesses with multiple owners need to address the possible permanent disability of an owner. The odds are much greater that a disability rather than a death will occur before age 65. But, most small businesses only address a death in succession planning. While  buy/sell agreements may address both death and disability, many only fund for death through life insurance.

A significant amount of capital would be necessary for one partner to buy out another and a buy/sell disability plan can provide the funding. Typically, after the disabled partner has been out for a period of one year or more, the remaining partner will get a lump sum based on the value of the business. Buy/sell disability policies should be purchased in conjunction with buy/sell life insurance policies.

The disability of an owner in a small business is a very real risk, and consequences could be catastrophic to the business and the business owner. Transferring that risk through insurance can be an excellent solution for small businesses.

Rick Welsh is vice president and manager of employee benefits, financial services, for Metzler Bros. Insurance, a full-service insurance company, which has been in business since 1946. He can be reached at (816) 421-6116, ext. 316.