What is Key Person Risk?
The Short Answer
Key Person Risk explained simply
Key Person Risk happens when a business depends too much on one person. This person might be the owner, a top salesperson, or a key engineer. If this person leaves, gets sick, or can no longer work, the business could face serious problems. This risk makes a business less attractive to buyers because they want a business that can operate smoothly without any single individual.
Real-World Example
The Coffee Shop Owner
Imagine a coffee shop where only the owner knows how to roast the special beans, manage all the staff, and handle all the marketing. If the owner decides to sell or gets sick, the business would be in trouble. A buyer would see this as a high risk because they would have to learn all these critical tasks or find someone else who can do them, which is hard and costly.
Why this matters
Key Person Risk matters because it directly affects how much a business is worth. Buyers want a business that can run without them having to be there all the time. If your business relies too much on you or another key person, buyers will see it as a risk. This risk can lower the sale price or even make it hard to sell your business at all. To get the best price, you need to show that your business can operate without any single person.
To reduce Key Person Risk, document your processes. Train other employees to handle critical tasks. This makes your business more valuable and easier to sell.
To reduce Key Person Risk, document your processes. Train other employees to handle critical tasks. This makes your business more valuable and easier to sell.
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