Many business owners encounter a significant challenge during their entrepreneurial journey that impacts both the value and growth of their business.
Key Person Risk.
Key Person Risk occurs when a business heavily relies on one person or a few people for essential knowledge, skills, and relationships. This is common in small businesses where the owner often holds these key roles.
If this key person is unavailable due to leave, illness, or, in the worst-case scenario, death, it can seriously harm the business’s performance.
Key Person Risk harms a business in two main ways:
- It makes it harder for the business to grow steadily over time.
- It lowers the business’s value in the eyes of potential buyers.
How Key Person Risk Impacts Growth and Business Value
Key Person Risk not only hinders your ability to grow but also potentially decreases your business’s value.
Effects on Growth
Key Person Risk can severely restrict your company’s expansion by:
- Limiting the number of new customers you can onboard.
- Impairing your ability to uphold quality control.
- Leading to burnout among business owners juggling multiple roles.
Often, this occurs when too much responsibility falls on the shoulders of one or a few individuals, detracting from the development of people, processes, and technology essential for sustainable growth.
Impact on Business Value
Key Person Risk also plays a role in determining the market value of your business. High levels of this risk may signal to prospective buyers that your business’s future performance could be unsustainable without your direct involvement. This perception increases the risk for buyers and can lead to:
- The necessity of “earn-out” arrangements.
- More complex and protracted negotiation processes.
- You are required to actively help the buyer transition, which could delay your exit and potentially affect the final sale price.
Mitigating Key Person Risk
Addressing key person risk proactively is essential to safeguarding your business’s performance and value. This strategic approach involves several crucial steps designed to distribute responsibilities more evenly, enhance team capabilities, and invest in systems that support business continuity.
Decentralise Day-to-Day Operations
Begin by detaching yourself from daily operations to reduce the business’s reliance on you. The goal is to make your role in daily activities redundant, shifting your focus towards strategic growth areas. This transition not only reduces Key Person Risk but also enhances operational efficiency.
Eliminate Non-Essential Tasks
Identify and delegate administrative and non-revenue generating activities. Bringing in support staff or outsourcing these tasks can free up your time and resources, allowing you to concentrate on areas that directly contribute to business growth.
Strengthen Frontline and Management Teams
Depending on your business structure, invest in building a robust frontline workforce or a middle management layer. This could mean hiring skilled professionals who drive revenue in a service-based business or capable managers and project managers who can effectively oversee daily operations.
Empower Your Team
Focus on empowering your team by placing the right people in key positions. This step is crucial for creating a self-sustaining business environment where employees are motivated and equipped to handle responsibilities independently.
Prioritise Strategic Activities
With the right team in place, you can devote more attention to sales, brand development, process architecture, and building strategic business relationships. These activities are vital for long-term success and will help elevate your business profile in the market.
Delegate and Build Independence
Maximise your business’s value by delegating critical tasks to trusted team members. Cultivate a business model that thrives on collective effort rather than individual exertion. This shift not only reduces Key Person Risk but also increases your business’s appeal to potential investors or buyers who value a company that operates independently of its owner.
By implementing these strategies, you ensure that your business is prepared to handle the absence of any key individuals and positioned for sustainable growth and increased market valuation. This holistic approach to mitigating Key Person Risk will make your business more resilient and competitive in the long run.
If you’re looking to remove yourself from the day-to-day operations of the business, scale and sell your business now or in the future, and are affected by Key Person Risk, our specialist advisory team can help. We’ll help build a business that is less reliant on you so you can maximise growth opportunities and business value.
For bespoke guidance tailored to your business, contact us at [email protected] or call (08) 8126 4100.