| 8. Do You Want To Go Into Business? |
Eight years ago, only about 20% of my clients wanted to go into business.
Most still preferred to find a job. Recently, the percentage preferring to start
or purchase a business has climbed substantially. That may reflect the
way Vocational Rehabilitation Coordinators view my services, in that they tend
to think of me for people who want to start or purchase a business.
But there are probably other reasons. Much of that time period was one
of recession, so jobs were tougher to find. And despite the Americans
With Disabilities Act, some people on disability believe they are at a
disadvantage when it comes to getting hired for certain jobs.
Some know that they cannot be reliable employees, and would have
difficulty with a regular schedule, either because of pain, lack of mobility, lack of
stamina, or some combination of those factors. Whatever the factors that may make
going into business a necessity, many consider that there are a number of
advantages even if it is not a necessity, but rather, an
option.
There is first of all the satisfaction of "being your own boss," It also
gives you a good deal of freedom and flexibility. You can be as versatile as you like.
And if you need to take a nap or lie down for certain periods during the
workday, no one is going to think it's odd, or make a disparaging comment to the boss.
And when you're in business for yourself, you are usually doing what
you love to do, or you wouldn't be in the business. So there's the element of
pure personal enjoyment.
Just as important for many people is the opportunity for significant earnings.
Often disability has caused financial problems, and a person's entire family
has had to drastically scale back its style of living. If a business has
enough potential, it may hold the promise of generating pre-disability earnings levels,
or exceeding them.
Some of my clients are seasoned business executives who have
managed large organizations. They need little or no help in evaluating opportunities
and getting their businesses started. Others are not so seasoned, but nonetheless
have options for starting or buying simpler businesses that look appealing to them.
For those clients I've developed my "going into business" forms, which
pose eight basic questions that anyone contemplating a business might do well to
ask themselves. In the instructions for those forms, there are some guidelines
and helpful thoughts, which are reprinted on ten pages at the back of this book.
If you're not experienced in writing plans or making financial
projections, you may want to enlist the aid of friends who are.
"Settling" Your Claim
Clients interested in starting a business sometimes ask the insuror to
"settle" their policies, in order to get the capital required. "Settling" usually means
that they receive a sum of money from the insuror, and in return they give up
any claims they may have to benefits under the policy.
Sometimes the "settlement" will be structured in such a way that the
person doesn't get all cash, but a combination of cash and an annuity, for example,
to provide some element of security.
In the event that a "settlement" might be of interest to you, I'll put down
a few thoughts here that might prove helpful. This is an area where there is a lot
of misunderstanding, and there tends to be an element of mystery about it.
There are many elements of it that remain a mystery to me, so the points here will
be made only briefly, and in general terms.
First, some insurors will not consider settlements. Among those that
will, they might be open to settlement at one point in time, but have no interest
at another time. Insurors are not obliged to settle a claim when requested to do so.
They can if they choose just keep paying your monthly benefit.
While insurors are not obliged to settle a long term disability claim, they
can be positively disposed to do so, if it can be shown that it would be beneficial
to the claimant and to themselves.
When insurors are happy to settle, it is usually because they can
be reasonably assured it will be financially beneficial to the claimant, and
because they will "free up reserves" and get some liabilities off their books by doing so.
For example, if they are paying you $3000 per month until age 65, and
you are 45, then theoretically they could be paying you $36,000 for 20 years, or
a total of $720,000. A lot of people mistakenly think, if they settle, that's
the amount they should get.
Insurors don't see it that way, however. The people who determine
what you'll be offered are not those in Vocational Rehabilitation, but rather, people
on the financial side. They use various calculations that result in their putting
a certain amount of money into reserves for paying that claim.
You might think it would be simply the amount of money they would need
to put into safe investments, in order to generate enough money to pay your
claim each month, but it's not that simple.
Using complex calculations, they figure out formulas and multipliers
for certain categories, and if your case falls in one of them, there isn't much you
can do about it, as I understand it. The amount you'd be offered would be
smaller, for example, if you fall in a category where most people go back to work in a
few years, or are likely to recover from the disability.
And depending on the nature of your disability and the terms of your
policy, there may be varying degrees of probability as to whether you will still
qualify for benefits after certain periods.
As you can see, it's an area that is anything but clearcut, but if you request
a settlement and if it makes sense from the insuror's standpoint (often it
doesn't), they are likely to get back with an offer. The problem is, it is difficult to
know what an insuror will offer you.
I'm often surprised. Don't be shocked if the offer is 30% or less of
what you'd get if you received benefit payments over the full term of the policy,
and don't be surprised if the offer is not open to negotiation. Occasionally it
might be, but many times it's not.
With one exception, I have no advice here, but I do have an observation. It
is about people who want to settle to invest in a business, but don't think
the settlement offer is large enough. Some get annoyed, and withdraw
their settlement request.
Others also get annoyed, but calculate that the offer, while not as large
as they had wanted, is nevertheless large enough for them to start or buy a
business that will generate the level of earnings they want, so they settle.
The one thing I'd strongly advise
against is letting a lawyer who doesn't know much about settlements of disability policies, try to negotiate for you
with the insuror. Some think they know and confuse it with settlements of
Workers Compensation claims.
They are not similar. In one case I worked for months with a fellow to get
a food wholesaling business off the ground, with the clear understanding that
any settlement would be within a certain range. Everything looked positive until,
at the last moment, his lawyer demanded 10 times what the insuror was offering.
The insuror withdrew the offer.
The Element of Risk
If your proposed business is risky, or if you have little business
experience and no plan, and you need your benefit payments to live on, it's probably not
a good idea to ask for a settlement, and you may well find the insuror is
unwilling to consider one if you do ask for it.
The same holds true if your health is such that there is a good chance
you will have to cut back your involvement substantially, before you get it to the
point that someone else can take over for you.
Some clients who have other resources, and do not need their
benefit payments to live on, are quite happy to take their chances, even in a
risky business. For those who depend even partially on benefits to meet their
living expenses, however, it is well to remember that if your business fails, you are
left with no income from the business and no benefit payments.
And if the business is not generating income, it's not likely to be worth
very much if you attempt to sell it. A number of clients have told me that they
can't rely on benefits for the long term, because they are depleting their savings,
and need to find a business that will generate more income than the benefits
are providing.
It's evident they need to do something, and operating a business is
sometimes their most realistic option. If you are faced with that set of circumstances, then
it pays to minimize your risks to the greatest extent possible. If you are
determined to go into business, one way to minimize risk is to purchase an existing
business that has a track record of stable earnings over a period of years.
If it is not a business that depends for its success on the personal
charisma, contacts, or skills of the current owner, and if you can determine that
no significant changes will happen after you buy, such as a rent increase, a
nearby construction project, the closing of a nearby factory or office park, a
sudden increase in the number of competitors, or a change in the buying habits of
your customers, then you'll obviously have less risk than you would if any of
these were about to happen.
You also
need to objectively assess your own abilities and
determination, as they relate to the current owner.
Is that person a super sales personality? Are
you? Does the current owner work 16 hours a day?
Can you, and do you expect to? Will you need to
make a number of changes in the way the business is
currently operated? How do you know those changes
will affect profits favorably?
Another way some clients purchasing businesses have minimized risk is
to pay a certain percentage down, then get the current owner to agree that
the balance due will go up or down depending upon profit levels. This gives
the current owner an incentive to help you become successful.
The Benefits of Accounting and Legal Advice, and a Plan
Tax laws change, of course, and so do interpretations, but there are
tax-wise ways to purchase a business. For example, in some instances people
have structured purchase agreements in a way that minimizes the seller's capital
gains taxes and spreads the seller's income over a number of years.
The buyer can then request, in view of the tax savings, that the seller
lower the asking price. Whether you are buying a business or just its assets,
it's advisable to check tax considerations with an accountant and lawyer, and to
work closely with them in negotiating the terms of purchase.
One last point. Whether you are buying a business or starting one, you
are well advised to have at least a simple plan, to help avoid unpleasant
surprises, and to have a reasonable estimate ahead of time how long it will be before
the business generates enough cash to support you.
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