Some insurers provide specialist Small Business Insurance cover specifically for small business owners to pay for business expenses such as business debts, fund partnership buyouts and in some cases, you can insure a x (times) factor of your key person salary.
The scope of this article is not to provide any business advice, but to help you understand how you can use innovative insurance products to provide capital if the need to buy out a business partner in the event of death or disability of that business partner.
Death of a business partner.
Apart from the emotional loss and the contribution a business partner may have made to the business. There is also the question of “what happens to their portion of the business?”, especially in a scenario where the deceased business partner contributes to the business on a daily basis and has vital roles and responsibilities.
In a case where you have a buy/sell agreement for such events that gives the surviving owners the right to buy the deceased owners portion of the business, you would need some way to obtain funds to execute the buyout and pay their estate in exchange for their portion of the business.
If you do not have a buyout agreement for such events, then you may well inherit the deceased owners’ spouse as your business partner and he or she may not have the skills that your original partner had, so you may be left with a co-owner that cannot contribute to the business, and that may not be good for the business, and its remaining owners and staff.
Then there is the question of whether the deceased partner provided security and guarantees for any loans for the business that may also have to be repaid, and additional guarantors may need to be found.
This is where small business insurance is a perfect solution to providing the funds for the buyout, without having to find money to repay loans and buy the deceased partners share of the business, because convincing a bank to provide funds in such as time where the business has lost a major contributor may not be possible.
Disability of a Business Partner
Death of a business partner gives you a definite time that a buy/sell agreement could be triggered, but what about the disability of a business partner, where the financial impact is the same, but your business partner is not deceased.
In a scenario where your business partner could no longer contribute to the business because of disability, a small business insurance policy could provide funds for a buy/sell agreement, so at some point in time when you business partner has decided they cannot return to the business and contribute at the same (or any) capacity, the money could be paid to fund this buyout as well.
Small Business Insurance
A specialist small business insurance policy may well be the best way to provide funds for your business in either event. Think about your options for a moment, if any of the previous two events occur, how are you going to get the funds you need when you need them most?
From a lending perspective, would you lend to a business where a co-owner who regularly contributes to the business and its success and bottom line profit can no longer work in the business?
It would be a risky proposition at best, as far as the lender is concerned.
Even if you could borrow the money you needed, then there are interest costs, legal costs, security requirements and guarantees.
With the correct specialist cover you could also use small business insurance proceeds for;
- Debt repayment (especially to release any securities that a lender may have as collateral).
- Recruit another key person
Business Owners should contact us
If you are a small business owner and would like to talk about protecting your business and key people in your business, please contact us before you need it.