Key Person Planning

 “As I drove to work this morning I can vividly remember the phone call I received at 7:30 PM the night before, informing me my business partner and key sales person were in a car accident.  My partner didn't survive and my key sales person was critically injured... and unsure if he would be able to return to work”  

All businesses, whether large mega corporations or companies with only a few employees have what are referred to as “key employees” - individuals whose contributions to the business have a significant impact on the bottom line.  When a business loses a key employee the effects may be devastating.  When a small business loses a key employee the effects may be catastrophic.

A small business may rely on a key employee to perform multiple duties with no backup in place and no one immediately qualified to take over in the event of a loss.

The risks associated with the loss of a key employee may be classified as:

»  Financial Risks
         Cost to recruit & train a replacement
         Loss of sales and hence profits
         Possible loss of bank financing or credit

»  Business Risks
         Loss of productivity
         Loss of customers

»  Other Risks
         Loss of employee morale
         Business continuity concerns

Key person planning usually involves determining the impact on the bottom line if a “key employee” dies or becomes disabled, and is no longer able to work, and how to fund the risks identified above in order for the company to regain its footing.

The options available to fund the loss of a key employee may be:

»  Do nothing and hope the loss is made up from current earnings
»  The owner may contribute personal savings to make up the loss
»  Borrowing money
»  Creating an internal company sinking fund
»  Purchasing life insurance on the key employees life

The above is intended to be a quick overview.  Knowing your options and having a plan in place in the event of the loss of a key employee may allow the business to continue in an organized manner.  Having no plan in place may force the small business owner to close the doors, sell the business at a loss or make other unintended decisions.

Have a Question? Feel free to call us at 405. 720.0333