How to Reduce Key Person Risk to Avoid Derailing Your Company

Key Person Risk is a very real threat that could derail even the best company.

Founders and Owner/Executives tend to share two great traits: they’re relentlessly optimistic and they’re pretty sure they’re invincible. As a 20 year consultant and advisor to these wonderful people, I admire them and share their traits. But—and this is a big but—unpredictability can take down even the most optimistic and invincible person, often times in a split second. When I had a serious horseback riding accident that left me hospitalized for three weeks and home-bound for another 8, my business came to a screeching halt. I wished at that time that I had made plans for just such an occurrence.

I help founders and owners, often called “Key persons,” maintain their optimism and simultaneously reduce the risk that their absence from actively running the company will derail the business completely. This is not theory, it is practical advice!

Three Steps to Mitigate Key Person Risk

1) MAKE time to assess what you, the owner or chief executive, does every day. This is more than a cursory glance at your calendar. It is an examination of what you do, who you talk to, what directions you give, what decisions you make and who is counting on you. Are there people to whom you’ve delegated some responsibility and authority? Write that down. It may take several 1-2 hour sessions of exploration to figure it out correctly. You’ll have more confidence in your analysis if you work with an outsider who asks good questions. What you don’t see can come back to hurt you.

Capture what you learn in a document and in a visual.

2) Determine who inside your company can take on each role and responsibility in case of your absence. Once you’ve decided this, have a conversation with each person. Explain your expectations of them in case they have to fill a role.

I always advise that the first conversation is between you and only the identified person. This privacy gives them a chance to ask questions and share any misgivings they have. You can provide reassurances, or you may realize that this person is not the right one. With the entire company’s future at stake, this is not the time for egos or pressure. You and your various designees will feel comfortable when these conversations are done well.

Once you’ve talked with everyone individually and confirmed your choices, you should gather everyone together and share your decisions. Should there be an emergency, it will be in everyone’s best interest for them to work together as you’ve envisioned.

3) Inform ALL outside professionals and stakeholders who advise your company. Include bankers and other financing sources; lawyers of all kinds; your CPA and auditor; your Board if you have one; and other outside stakeholders. The goal is no surprises! Every person who may need to interact with your substitutes should know who they are and that you’ve appointed or designated them.

Whether or Not You’re Thinking About an Exit

The M&A experts I know regularly bemoan key person risk. They bemoan that owners simply don’t take it as seriously as they should. Their perspective is that potential buyers will reduce the value of the company if key person risk reduction is not documented.

Even if you’re not anticipating an exit any time soon, planning for an unexpected absence of the owner or founder/executive ensures that your company continues to thrive in your absence.

Put a small amount of focused effort into reducing key person risk and keep your prosperity intact. If you’re thinking you should reduce key person risk, give me a call: 703-801-0345.

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