Exposure to staff

So often when assessing and reporting on the value of a business we trouble over the reliance a business may have in a single person in the enterprise. This reliance affects the value of the business, obviously. More practically, what happens to the business when something horrible happens to this key person?

Almost all businesses I deal with which have more than one director shareholder, member or whatever, has a key man policy in place for each of the “partners”, so that should something go wrong, an insurance policy will pay out sufficient to compensate the other partner(s) so that they are able to buy their now late partner’s shares from his or her widow.

The obvious trick is to prepare the paperwork properly; use a good broker and establish an accurate value of the business. Cocking it up can cause unwanted problems for all those left behind. That is all fair common sense, and you will read about it all the time.

So what about those key employees who are absolutely essential to the enterprise, but not in the manager, ownership, directorship structure? For instance the software specialist who has been working on that application which should be rolled out in the next year. You know; it’s going to make you all super rich, but which nobody else has the foggiest idea of what he has done to get it to this beta version.

Or what about the chemical engineer who is responsible for designing your biggest customer’s adhesives, the man who has recently designed that new product. Or what about that super salesmen who really understands the industry and cracks all the best deals for you. Every CEO knows that the business cannot do without the sales people. (Please don’t tell them)

Ever wondered why it is called “key man” insurance, and not “fellow director” insurance?

Kiyosaki, Gerber and others have written about one man businesses being self employment. Even businesses with lots of employees can be exposed to a single shareholder not being able to come to work. That exposure affects the value.

Drill down a bit, and think about how the value of a business can be affected by the sudden absence of a single employee. Think about how much money you would need to see you through a crisis in his life, how much it would cost to replace him; and then insure for it.