One of the most crucial roles in business besides the CEO is the key men. What exactly is a 'Key Men' and who are the Key Men in your company? They don't have to be the CEO, but they could also be the CEO. Simple questions to recognize, who are the keymen in your company:
Here are some problems created by the loss of Key Men:
Profits could be lost, especially if the loss of the key executive has a major impact on the financing or completion of projects.
Creditworthiness may be impaired, especially in servicing current loans or when applying for new loans.
Cash flow may be tight when creditors push for repayment of loans guaranteed by the key executive. Debtors may also delay payment.
The cost of replacing or hiring a new person could be high.
Employees and business partners may view the company as 'shaky' and lose confidence in it.
Considerable time and effort are required to rebuild both goodwill and rapport with clients, suppliers, and bankers.
A: Estimate the difference between a key person's current salary and the amount that would be paid to a person who only did the key person's basic duties.B: Assess how long it would take to find and replace a key person.To calculate the replacement cost: Multiply A x B
Estimate the percentage of lost profits directly attributable to the unique talents of the Key Person over a period of time after the Key Person's departure.Year 1: $1,000,000Years 2: $600,000Year 3: $200,000To calculate the total loss: Year 1 + Year 2 + Year 3 = $1,800,000
To calculate the current salary: Salary x 12 x years of assuranceThen the question goes, what can you do to protect your revenue-generating ability, liquidity, and cash-flow?
First off, the company will need to pay a premium to an insurance company, while the insurance company will then pay proceeds to the business.The insurance company is to ensure the business against death, disability and early-stage critical conditions of Key Man A. Option to change life assured to Key Man B in event Key Man A resigns.Second, a business can also consider buying a keyman policy. The criteria of key men protection policy:
The content of this article is an extract of Peter Singuilli's talk during the Accounting and Finance Show 2019. You may also be interested in Outsourcing: What and when it could work for your business?