20
April
2017

Key People Risk

Small Business & Key people - Double edged Sword

Almost every business I deal with has people in the organisation that are crucial to its ongoing success.   Part of the financial planning process for businesses is minimising the risk of losing one of these key people.

The best way to minimise this risk is to have business practices that aren’t too reliant on individuals. Well defined processes, work flows and job descriptions that allow a new person to perform any given role is an excellent method to ensure business operations continue on without too much disruption if staff members leave.

Even with excellent processes and a wide range of income producing staff members, there are often key people whose loss will definitely have a negative impact on the business. Owners, those with high levels of expertise (especially if this is a specialised skill), top performers or those who may be seen as the face of the business are examples of these key people.

These key people can leave by choice or involuntarily.  When discussing involuntary exits we are primarily focussing on death and ill health (both temporary and long term), but it also includes things like no longer being licensed or exits for legal reasons. Obviously all key people can choose to leave at any point.

The death or ill health of a key person is the easiest risk to mitigate. These are insurable events and with correct advice you can determine the financial cost of losing these people and simply take out key man insurance to cover this cost. 

Voluntary exits are harder to manage.  The best option is to keep key people in the business. Key people who are not owners are much more likely to leave.  As a small business if you have an employee that is a key person, retention strategies are a necessity.  I’m going to assume we all aim to make our businesses a great place to work, so Ill focus on some tie down strategies.

The most effective way to keep key individuals is through equity in the business. Once they are an owner in the business key people are much less likely to leave. It is incredibly important that, in the event you provide equity, they pay fair value and profits are distributed in a transparent and defined method, the same for the value of the business.

Another common retention method is funding education in exchange for tenure. In this event the cost of repaying education costs will usually be enough incentive to stay.

If a key person is heading towards retirement, whether they are an owner or employee, a succession plan is required. These outline a successor, a training plan and, in the event of an owner leaving, a plan to buy out the owner may also be required.

Managing the risk of key people is an important part of keeping a business successful in the future.

 

  

Author; Alex McKenzie Categories: Future Financial Services Blog

About the Author

Alex McKenzie

Alex McKenzie

Owner at Future Financial Services

Past:

  • Paraplanner at Zammit Partners Investments
  • Unit Trust Administrator at Colonial First State

Education

  • University of Western Sydney
  • Penrith High

About

As a Financial Planner I help people to achieve what they would like in life. This involves helping you to identify the things in life they would like , developing plans to help achieve them and strategies to protect what you already have. We do this by providing Financial Advice to guide you through your life stages.

The financial planning process involves determining a clients current situation and financial objectives and tailoring strategies to assist in best achieving those objectives.

I am an expert in superannuation, investments and insurance, these are tools we use to help you achieve your goals.

I aim to use my knowledge of superannuation, taxation and Centrelink to efficiently use your assets and income to achieve your financial goals.

Retirement and pre-retirement planning, wealth creation, asset protection, insurance planning and estate planning are all areas of advice that I provide.

Leave a comment

You are commenting as guest.