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Most small businesses start from the skills and experience of one key person.
Someone with the knowledge and expertise to provide a specific product or service. Whether passed down through the family or started from scratch, the entire business is built around and dependent on them. This puts many small businesses in a risky position should that key person decide to take leave or is unable to fulfil their duties.
What is Key Person Risk?
Key Person Risk is the risk the business takes if one key person cannot fulfil their role, either from long-term sickness or circumstances outside their control. The extended absence of this person has a critically negative impact on the business’s operations and overall performance.
Key Person Risk restricts the business from achieving sustainable growth as it is dependent on one/a few people and negatively affects the valuation of a business.
How to identify Key Person Risk
In many cases, the key person is the business owner. Still, the most straightforward way to identify key personnel is to ask whether the business could continue to operate if they were no longer working there. This includes contact with clients and customers.
Identify potential Key Person Risk in your business by considering the following questions:
- Who are in positions of power?
- What roles do they execute that cannot be done by anyone else?
- Is the knowledge of these employees being managed effectively?
- Where is the risk to the company if these people are to leave?
How does Key Person Risk affect growth?
Key Person Risk can limit the number of new customers accepted due to a lack of experienced hands to do the work.
It can impair a business’s ability to maintain quality control as the learned experience of the key person usually produces that high standard through execution or supervision.
Furthermore, it can lead to burnout of business owners managing all the different aspects of the business whilst still doing the day-to-day operations.
How does Key Person Risk affect business value?
If you are trying to sell your company, but Key Person Risk is high, a prospective buyer will be concerned about the sustainability and future performance of the business without that person.
The higher the perceived risk, the lower the valuation.
How to Mitigate Key Person Risk
Through standard processes, defining roles, automating workflows and cross-skilling staff, you can build a business structured to withstand the loss of almost any one individual.
1. Key processes
For businesses, understanding what tasks are necessary for operations to continue and who typically performs them means that anyone can step in and follow the same process.
It may take longer for a new person to perform those tasks, but by using documentation such as flow charts, step-by-step guides and manuals, you can ensure that knowledge can be passed on and referred to at any time.
Having a complete idea of processes also allows for automations to be implemented for a more efficient and productive workflow.
2. Spread knowledge/cross-train
It is important to educate and upskill staff in other areas of the business. Even if there is no current role in need of filling, it will make transitions to new positions easier and allows you to spread the risk across the business.
In addition to forming a more robust and capable team, having the complete picture of how each department contributes and how their specific role impacts the business’s function adds to an employee’s investment in the company, which reduces the risk of them leaving for a competitor.
3. Relationship management
Communicate to customers and stakeholders if a key person (particularly one in a highly visible role) will be absent for some time or leave the business for good. You can restore confidence quickly if you explain how their absence will be handled, what plans are in place and highlight any potential flow-on impacts.
This reduces the risk of the customers following the key person and deepens their trust in the business.
4. Include a health benefits strategy
This strategy assists Key Person Risk from two angles. It helps your top employees improve and maintain their health, reducing their risk of a severe health issue or injury, and showing them how much they are valued minimises the risk of them leaving for a competitor.
Especially if the key person is the business owner, keeping yourself healthy and balanced has many positive flow-on effects on the business.
If you would like to analyse your business for Key Person Risk and make a plan on how to best mitigate it, our business advisors can assist and help put strategies and processes in place for a business that is less reliant on one key person. Contact us at 1300 826 494 or email us at firstname.lastname@example.org.