Key takeaways
- Key person risk is anyone whose two-week absence would stop revenue, delivery or cash. Usually that includes the owner.
- The fix is written procedures, shared access, a second person trained on each critical task, and a cadence that runs without any one attendee.
- A buyer or lender will price key person risk into the company, so reducing it raises what the business is worth.
- Test it by taking two weeks away and watching what breaks, then fix that first.
Every small company has a few people it cannot function without. The owner who holds every relationship. The office manager who alone knows how invoicing works. The lead technician who is the only one who can do the complicated jobs. The developer who built the system and never wrote anything down. Nobody plans for these people to be gone, and then one of them is, for a week or forever.
Key person risk is the most common hidden weakness we find in companies across British Columbia, and it is also one of the most fixable. Here is how to find it and reduce it.
Find it honestly
Take the org chart and ask one question for every person. If they were unreachable for two weeks starting tomorrow, what would stop. Revenue, because they hold the customers or close the sales. Delivery, because only they can do the work or schedule it. Cash, because only they can invoice, pay or access the bank. Systems, because only they have the passwords or understand the setup.
Write the answers down by person and by task. Most owners find that the list is shorter than they feared in people and longer than they feared in tasks, and that their own name is at the top of it.
Include suppliers and outside people in the exercise. The bookkeeper who has done your books for ten years and the developer who hosts your website are key people too, and they are not on your payroll.
The four fixes
Our SOPs and playbooks work and our fractional CTO service exist in large part to do the first two of these. The third and fourth are management habits that cost nothing but attention.
- Written procedures for every task on the list, in the short checklist style people actually follow, kept where the work happens.
- Shared access. Every system, account and password in a managed password tool with at least two people holding administrator access, including the owner.
- A second person trained on each critical task, who does it at least once a month so the knowledge stays live.
- A cadence that runs without any single attendee. The weekly meeting happens whether the owner is there or not, because the page of numbers and the agenda do not depend on a person.
The owner is the biggest risk
Owners write this list and quietly exclude themselves. Do not. If the business stops when you are away, the business is a job with staff, and a buyer, a lender or an insurer will treat it that way. Reducing your own key person risk is the same work as getting out of sales, out of dispatch and out of every seat you hold by default, which is why we write about those separately.
Where a company depends on the owner's licence or professional standing, such as a gas fitting licence or a regulated professional designation, the fix includes a second licensed person or a succession plan, and that is worked out alongside the relevant regulator and your lawyer.
What a buyer or lender sees
Through BizSell.ca, Ali values and sells companies, and key person risk is among the first things a buyer asks about. A business that runs without its owner is worth more and sells more easily than one that does not, and a bank will ask the same questions before lending. Reducing key person risk is not only insurance against a bad week. It is one of the few things an owner can do that raises the value of the company directly.
Life and disability insurance on key people is part of the picture and is arranged with a licensed insurance adviser, not by us.
Test it
The only real test is absence. Take two weeks away with no calls, and have each key person do the same at some point in the year. Watch what breaks. Then fix that first, because the test has told you exactly where the risk is. Repeat annually and the list gets shorter each time.
The common mistakes are documenting everything except the tasks that are actually critical, leaving access with a departed employee or a vendor, training a second person once and never again, and the owner never taking the two weeks because the business cannot spare them. That last one is the risk, stated out loud.