Most businesses, regardless of size, are the result of the driving force of one person or a group of people. As businesses grow, they become more capable of operating without their key person: Bill Gates no longer runs Microsoft; Apple is thriving in the post-Steve Jobs era; and Tesla seems likely to transition to new management soon.
If your business still relies on the input and direction of one or a group of key people, then it may be at risk if that person or group can no longer be involved in the business.
People leave the businesses they are integral to for a number of reasons. They may become ill, wish to retire, leave to work for a competitor, or sadly pass away.
When that happens, businesses can be left floundering. This is even more pronounced if your business’s reputation was based on the presence of that key person. Customers may leave to do business with your competitor, even if there is no measurable decline in the services or products you offer.
Whether the loss of your key person causes nothing more than a change in perception, or if their departure marks a drop in quality of service or products, you can minimise the risk by taking out insurance on this person (or group).
What key person insurance covers
If your key person leaves the business voluntarily, key person insurance doesn’t apply. It comes into play if your key person becomes incapacitated or passes away.
While you may be able to recover from the loss eventually, if the key person was so integral to your business that it means additional expense to find a new operating model or replace the person temporarily or permanently, then key person insurance applies.
Put simply, key person insurance works like life insurance, except the business is the beneficiary instead of a dependent person like your spouse.
Reducing the risk
If you know your business depends heavily on one key person, you may want to consider ways to reduce the risk.
- Create a knowledge base
If your key person is important because they have a great deal of industry, customer, and company knowledge, you can reduce the risk by asking them to transfer that knowledge to others in the company. You could consider asking them to develop a knowledge base, which is a series of documents that formalise their knowledge in an easy-to-use format.
- Meet their contacts
If your key person is irreplaceable because of the relationships they have with important industry players, then it’s important for them to introduce more members of your business to these people.
- Train others
If your key person has specialist training that makes them unique in your organisation, consider whether they can pass on that training to someone else in the business or if you can hire someone with similar skills to spread the risk.
- Inspire others
If your key person is the visionary in your business and the source of all your creative ideas, then it could be worth trying ways to inspire others to flex their own creative muscles under the key person’s guidance. Genius can’t be taught but, with encouragement and support, people can learn to unleash their own visionary capabilities, spreading the responsibility for innovation throughout the business.
- Get insurance
In some cases, it’s simply impossible to reduce the risk to the business of losing a key person. That’s where key person insurance can help you. You can use the payout to keep the business afloat while you adapt to the loss or pay off debts and wind up the business responsibly.
For more information on key person insurance and how a NZbrokers member can help you, contact us today.