What If Your MVP Went MIA?

When one individual is responsible for a generating a large share of a company’s revenue, major problems can happen if that person is lost to death or disability.

Businesses are vulnerable when they’re structured around a single person. Smaller companies are generally the ones most at risk. They are statistically more likely to depend heavily on a key person. According to data from the National Association of Insurance Commissioners (NAIC), almost three out of four small firms surveyed said they were very dependent on one or two key people for their success.

If this kind of thing might be the case in your company, there are several things you can do to identify and mitigate the risk.

Six Questions to Ask

As you begin your planning, you should consider a few important questions about your key person that cover areas both inside and outside of your operations. Ask things like:

• Can the person be replaced?

  If so, what would replacing the person cost? How long would it take?

• What knowledge has been lost?

  If the person had years of experience with your company, what kind of specialized skills and knowledge have been lost? What would it take to replace them?

• Will there be a greater social or community impact?

  This pertains to things like serving as a board member for another organization, being a public figure, participating in industry associations, being a source of referrals, and other ways your company’s reputation or image might be impacted.

• Will there be any internal impact?

  If the person is a leader within your company, what other effects would their absence have on things like morale, productivity, and culture? Will your business incur any additional employee losses?

• How will revenue be affected?

  If the key person was a primary sales figure, or was responsible for generating the most business activity, how much money might their absence lose you? What potential opportunities may be lost?

• What relationships may be lost?

  Relationships with people like clients, vendors, suppliers, industry groups, lenders, partners, and so fourth all have tremendous value in business. If your key person is responsible for many of these, how might this loss impact your company’s position with these entities?

Insurance Options

Given the potential losses that could be incurred, about a quarter of small businesses have some kind of insurance policy to help offset the fallout from losing a key person, the NAIC found. In some cases, the policy is designed as life insurance to help a company continue to operate and help fund the search for a replacement employee. In others, it’s a policy designed to help the company fold according to a pre-determined plan, such as providing severance pay to employees and closing in an organized way.

According to the Insurance Information Institute (III), a nonprofit insurance association, any type of individual that is essential for business operations might be considered a key person.

Before purchasing any kind of policy, it’s advised that companies first assess at least a general dollar value to determine how much coverage will be needed. Your insurance provider may have a formula to help determine this figure, or you can calculate it yourself based on your answers to the six questions mentioned earlier.

According to the III, key person insurance comes in two primary forms:

• Key Person Life Insurance – Provides the business with an infusion of cash if an insured key employee dies, regardless of cause or place of death. These funds can help compensate for revenue lost as a result of the death, as well as pay off debts, buy out surviving shareholders’ interest from heirs, and finance the costs of a new employee search or training program.
• Key Person Disability Insurance – A key person disability policy provides funding to a business to make up for lost revenue, the cost of hiring a new employee, and other related expenses if a key employee becomes partially or fully disabled.

Should You Insure Your Key Person?

In business, we know that it’s unwise to have all of our eggs in one basket because it puts us at risk. If you have a key person that is responsible for a large part of your company’s success, it might be wise to put protections in place to keep things afloat if you ever lost them. Fortunately, a simple assessment of the value of their responsibilities will give you an answer and a phone call to your insurer can likely get you protected.