Key-person risk
Exposure to the loss or unavailability of a person whose relationships, skills or authority are important to a business or fund. The disruption can be material without eliminating all remaining value.
Related variants Key-person clause, Key-person insurance
Key-person risk in practice
Hypothetical: a founder personally manages important customer relationships. Diligence examines whether colleagues can maintain those relationships, what authority can be delegated, and how a transition would work. No age, tenure or retirement date is assumed.
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| Dependency | Possible mitigation to assess |
|---|---|
| Customer relationships | Broader relationship coverage and handover |
| Knowledge and authority | Documentation, training and delegation |
| Financial exposure | Insurance only for covered events and within policy limits |
Shayne Fitz-Coy’s definition of Key-person risk
Key-person risk is the risk that one person is so integral that without them there is no value left to create. It is a standard diligence item and it is usually the founder.
The tell is a seller calling the owner absentee. The better-run small businesses have an owner leaned all the way in, which is the same fact wearing a friendlier label.
Terms Related to Key-person risk
Founder-led business · Due diligence · Second bite of the apple · Succession planning · A Player Disease · Customer concentration · All of the glossary