Minimise key person risk, unlock growth and optimise business value.
There is a significant issue many business owners face at some point in their journey which affects the value and growth of a business.
Key Person Risk.
What is Key Person Risk?
Key Person Risk is evident in a business when a large proportion of knowledge, skills, and important relationships are placed in the hands of one or a few team members. For many small businesses, this usually sits in the hands of the business owner.
Find out more about Key Person Risk, how it affects business growth and the value of a business in the video below.
If that key person takes leave, becomes ill, or worst case scenario, pass away, there is a risk of substantial negative impact on the business’s performance.
Key person risk affects a business in two key ways:
- It negatively affects the business’s ability to grow in a sustainable way;
- It negatively affects the perception of value by a prospective buyer in an M&A transaction.
How Key Person Risk affects growth
We talk to many business owners who are looking to scale up now or in the future. A common element among many of those clients is their vulnerability to Key Person Risk, which will ultimately affect the business’s ability to achieve sustainable growth.
Key person risk can have a negative effect on growth because:
- It can limit the amount of new customers that can be onboarded
- It can impair a businesses ability to maintain quality control processes
- It can lead to burnout of business owners who are “wearing too many hats”
If you or one person in the business is doing everything or most things, you’re likely not investing the necessary time into your people, processes and technology to drive sustainable growth.
How Key Person Risk affects valuations
Whilst Key Person Risk affects a business’s ability to grow, it will also significantly affect the value of a business.
If Key Person Risks are high in your business, a prospective buyer will be concerned about the sustainability of future performance, in the event that you are not working in the business. So as the perceived risk of your business increases, the valuation is reduced.
If you’re looking to sell your business now or in the future, and have high levels of key person risk, you could be looking at:
- The introduction of “earn-out” arrangements
- A much more complicated deal
- And you may find yourself having to convince a buyer how you’ll help them take over and phase yourself out of the business, which will result in a much slower exit.
So, how can you mitigate or avoid Key Person Risk in your business?
How To Mitigate Key Person Risk
Untangle yourself from the day-to-day operations so the business is less reliant on you. Essentially, you want to make yourself redundant from certain aspects of the daily operations.
So, how do you do that?
Start by bringing in support that can eliminate as much of the admin or non-revenue generating activities from your task list.
Next, you should focus on building out either your frontline staff – those key people who are contributing to the production of revenue from a services context, or fill your middle management layer with managers or project managers.
You need to get the right people in key seats to give you more time to focus on sales, brand development, process architecture and building strategic business relationships.
To maximise the value of your business, you must focus on delegation to your key people and building a business that is less reliant on your personal exertion for its success.
There are many factors that contribute to the continued growth, profitability and value of a business, and one of them is ensuring that Key Person Risk is mitigated, and the business operations are less reliant on yourself or one key person.
Having recognised the problem makes it possible to escape the Key Person Risk by analysing your business and identifying those areas that you can remove yourself from, giving you more time to focus on growth, and ultimately, build a more valuable business.
If you’re looking to scale and sell your business now or in the future, and are affected by Key Person Risk, our specialist advisory team can help you build a business that is less reliant on you so you can maximise growth opportunities and business value.
Contact us today at admin@elementsag.com.au or call us on 07 3878 9181.
