There are many factors that influence the success or failure of a business. The costs of doing business, including manufacturing, distribution, and marketing of products or services are some of these financial factors. Overhead costs, such as rents, employee salaries, and utilities can also eat into the profitability of a given company.
If the company’s owner and/or key employees should die unexpectedly or become disabled and cannot work, overhead costs continue to pile up. Business operating expenses may be protected using a specialized form of insurance that helps to cover overhead costs in cases of disability or loss of the owner. These policies provide money when it is needed, and premiums are generally considered tax-deductible business expenses. Business overhead expense insurance policies protect a company from forced liquidation, helping to preserve the hard work and market share the company has developed over its time in operation. In this guide, we will introduce business overhead protection plans and discuss options available to business owners.
Before delving into business overhead protection plans, it is useful to take a look at statistics associated with disability. The odds of a business owner becoming disabled for 90 days or longer before reaching the age of 65 is surprisingly high. If there is more than one owner, the odds increase dramatically. For example, a single business owner aged 30 has a 54% chance of becoming disabled for 90 days or longer. A business with 5 owners, all around the age of 30, shows a 98% chance of one of the owners becoming disabled.
The odds drop with age, but the numbers are still significant. Building on the example above, a single owner aged 55 has a 25% chance of a 90-day or longer disability. With 5 owners the same age, there is a 76% chance one of those owners will become disabled.
The length of disability is high as well. For disabilities lasting longer than 90 days, the average duration of the disability is approximately 2.2 years for a business owner aged 30. For a 55-year-old owner, the average duration of disability is right at 2.5 years. These numbers have serious implications for business operations.
How Will Business Overhead Expenses Be Paid?
In the case of a long-term disability or the death of one or more primary business owners, many companies struggle to pay for the day-to-day expenses associated with keeping the business running. Day-to-day expenses, or business overhead, consists of costs like:
- Telephone service
- Mortgage interest
- Property taxes
- Depreciation costs
- Office supplies
- Equipment rental and maintenance
These costs continue to stack up, even if the owner were to become disabled and cannot work. Of course, these expenses must continue to be paid, regardless of the circumstances. The business and its leaders have important decisions to make regarding the future of the business and its continued operation, especially when it comes to a long-term disability.
Alternatives in Cases of Owner Disability
When a business owner becomes disabled for a length of time, three potential scenarios as to the future of the business arise. Each scenario has its own advantages and disadvantages. The first is to sell the business, which can serve as a relatively viable alternative only if the current owner wishes to sell and can identify an interested party with the funds needed to complete the sale on favorable terms.
A business may liquidate – and, in fact, financial analysts refer to this scenario as a forced liquidation. The business may be disposed of rather quickly in this scenario, but the terms may not be favorable. The business may sell for a fraction of its true value, especially when contrasted to the value of the business if it was still operating with an eye to the future. Owners and family members may also rush into agreements before carefully evaluating the business operation and its intrinsic value.
Finally, remaining owners and family members may wish to maintain the business. This has advantages when the owner’s disability is considered to be a short-term situation; he or she can return when recovery is complete. Without a viable source of income, however, operating expenses pile up and the remaining alternative may end in a company sale or forced liquidation.
Funding Sources for Overhead Costs
Business expenses continue to accrue, even if a business owner is disabled. There are several potential sources of income to cover these expenses. As with the scenarios discussed above, there are strengths and weaknesses to each of these income sources – and most stand out as insufficiently reliable to ensure business continuity. Funding sources include:
Business and Personal Savings – smart business owners know that they need to create a savings plan to hedge against future circumstances. However, saving revenues can be a lengthy process. If a business owner were to set aside 10% of revenues each year, it may take 10 years or more to save one year’s worth of business revenue. Owners facing a long-term disability may consider dipping into personal savings to cover overhead costs, but this can create further financial instability and hamper the ability to pay for personally-related expenses.
Loans – a loan is an option, but finding a lender willing to fund a loan while the owner is disabled is difficult, at best.
Asset Liquidation – a business may opt to sell a portion of its assets, including equipment, inventory, properties, and vehicles. Again, this option is considered a forced or emergency liquidation. Selling assets can interfere with the continued operation, and it also lowers the value of the overall business.
Personal Disability Income – like personal savings, a business owner may attempt to cover operating expenses with this income source. However, the owner and his or her family’s expenses will still need to be covered, and using disability income for business means that it may create significant financial hurdles for the family.
There is only one reliable source of funds to pay for business overhead expenses. Referred to as business overhead expense protection, this funding source has many advantages over the alternatives. In our next article, we will go over the highlights of this source, helping business owners to make smart decisions about the future of their operations.