20 S. Clark St.,
Whether a partner or key innovator suddenly dies, or a younger partner gets sick or hurt, you might think, “It’s ok we’ve got that ‘keyperson’ insurance.” Too often, you’ve got nothing set aside. Too often, you’ve only got personal disability insurance – but this isn’t going to cover the cost of replacing the family’s income – for 50 years! In our experience, planning for the event of a disability of a partner or owner is rarely addressed. Personal disability coverage does nothing for the “business entity.” It doesn’t fund a purchase from the disabled individual and doesn’t come close to replacing the income for the family. Worse than that, a surviving partner is often left holding the bag, supporting the disabled partner’s share of the income when revenues may be collapsing due to their absence. This places financial hardship on the business and a strain on personal relationships. Our experience educating small firms tells us that many believe one insurance policy will cover everything. But it’s too late to play catch-up when that phone rings.
The smart firms start before a problem surfaces by modeling the future cash needs of their business with the existing team in place and otherwise difficult and unexpected crises.
And what if people live!?! We often see a promise to buy out a business at a given point. Yet where will the funds come from? Usually from ordinary income, which may or may not be there to support a buyout without proper planning.