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How to Help Protect Your Business Against the Loss of a Key Employee

Small Business
man working in warehouse thinking about how help protect your business against loss of key employee

Many ingredients make up a prosperous small business — and a key employee is often the secret to success. This person can play many roles in a company: It could be you. It could be your co-founder. It could be any employee at your company whose skills, talents and direct efforts help your business thrive.

One of the many challenges of running a small business is finding ways to help protect its long-term performance. Does your company have a plan in place to help protect it against the loss, sudden death or disability of a key employee?

Learn how to spot these star performers and how you could help protect your company against the loss of a key employee.

The Key to Success

Maybe he or she is responsible for product research and development, or perhaps this person creates the unique marketing strategies that have always worked wonders for your company's growth. A key employee could be the tech guru, the head of human resources or the director of finance, and it might seem like everyday operations would fall apart without them.

Losing a key employee would mean losing all their skills — and possibly your business's secrets to success. Would your company be able to handle such a loss?

Consider the following to see if your company is prepared:

  • If you lost this employee, would any product development or attempts at diversification come to a halt?
  • Would orders and sales clearly suffer?
  • Would client or supplier relationships be in jeopardy?
  • Would you need time to find your footing running all the systems this person headed?
  • Would you need significant resources to find a new person to play these roles — or maybe even several new people?
  • Are legal entanglements possible if you lost this person?

Protect Against the Loss of a Key Employee

Most small businesses do not have the funds available to meet the costs of losing a key employee. This lack of necessary funds could result in a company having to borrow to pay any unexpected legal expenses, as well as commit significant amounts of time and resources to hire someone (or several new people) to take this person's place.

In fact, lack of available cash to buy out any interest owned by this key employee could require the sale of your business to an unknown third party. Such a deal could also become necessary to pay off debts, taxes or other expenses incurred before the sudden loss of this employee. Without adequate foresight and planning for this type of circumstance, a business could face many difficulties.

Fortunately, key person insurance could help mitigate this risk. With key person insurance, a company takes out a separate insurance policy on a key employee, pays the premiums on the policy and remains the sole policy beneficiary.

This means that if the key employee dies or suddenly becomes disabled, the company receives the policy benefit. (The company does not receive the benefit if the employee quits or is fired.) This benefit could help provide the necessary funds to keep the business up and running. It may also provide some options while the business figures out how to fill the key person's shoes.

When considering how much of a policy to take out, think about the amount of cash your company might need to help protect against losses, and possible bankruptcy, while you try to replace the key person and train any additional new employees.

If your company is a sole proprietorship, chances are that key person is you. You might also consider taking out a personal life insurance policy to protect your home and family — as key person insurance isn't the same as life insurance.

The recipe for success is different for every small business, but a key employee is often the secret ingredient.

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