Who are the Key Men in Small Business?

Importance of Key Men

Here are some problems created by the loss of Key Men:

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1. Loss of Profits

Profits could be lost, especially if the loss of the key executive has a major impact on the financing or completion of projects.

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2. Loss of Credit Worthiness

Creditworthiness may be impaired, especially in servicing current loans or when applying for new loans.

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3. Impact to Cash Flow

Cash flow may be tight when creditors push for repayment of loans guaranteed by the key executive. Debtors may also delay payment.

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4. Cost of Replacement

The cost of replacing or hiring a new person could be high.

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5. Loss of Confidence

Employees and business partners may view the company as 'shaky' and lose confidence in it.

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6. Loss of Key Relationships

Considerable time and effort are required to rebuild both goodwill and rapport with clients, suppliers, and bankers.

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How To Place Value on Key Employees

1. Replacement Cost

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

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2. Contribution to Net Profit

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

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3. Current Salary

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?

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How Key Men Protection Works?

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 owner/applicant is the company.
• The insured is the key person.
• The beneficiary is the company.

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?