Key-person risk

Key-person risk exists wherever too much of a company depends on one person. The dependence can be on their decisions, their relationships, their knowledge or their name. If that person is suddenly unavailable through illness, death or departure, the business struggles to function or loses value.

In family companies the key person is very often the founder, and the risk is usually larger than the organisation chart suggests. Typical signs:

• Customers and banks trust one person. Major accounts or credit lines rest on a personal relationship with the founder.
• Decisions route back to the founder. Managers wait for their view even on matters they could decide.
• Knowledge is unwritten. Pricing logic, supplier history and the reasons behind past decisions live in one head.

The articles does your company depend too much on you? and why the bank still wants the founder look at these signs in more depth.

Key-person risk or key-person insurance?

The terms are often used together. Key-person risk is the exposure itself. Key-person insurance is one financial response to it: a policy that pays the company money if the person dies or, in some policies, becomes disabled. Insurance can soften the financial shock. It does not put anyone in the room who can make the decisions.

Why it matters for preparing a successor

The lasting answer to key-person risk is to move relationships, decisions and authority to other people while the founder is still there. That is why an emergency succession plan and a real successor development plan belong together. The article on when the founder falls ill suddenly shows what happens when they are missing.