By virtue of being small, the operation of the business will be built around a small group of people. Apart from the owner, partners, and anyone who provides capital, there is likely to be at least one employee whose contribution to the business is critical to its survival. Indeed, without this person’s contribution, the business might never get off the ground let alone prosper. The nature of the contribution will change with the business. Expertise is usually very specific.
It can be the skill of creating food significant numbers of people want to eat, or it can be the ability to sell the products and services offered by the business. The more the business depends on this individual, the greater the need to plan for the unthinkable. What do you do if this person is no longer around? OK, so you start with the thought this would be a disaster and then calm down enough to work through all the issues.
You have to look at this from two different points of view, and then make decisions balancing as many interests as possible. Internally, you may face real problems in maintaining business operations. Will your customers continue to use your business? Can you remain solvent? This requires you to plan how to replace this person. If you are lucky, this will be a good-humored separation with a reasonable period of notice given. This will allow your key person to support the transition to a new person. If you are unlucky, your key person will drop dead without any warning. The second point of view to consider is from outsiders – the people who have invested in your business or lent money to it. How are you going to maintain their confidence in your management skills? More importantly, what steps have you taken to safeguard their capital contributions and loans?
No conventional insurance company will sell you a policy against a key employee resigning. Such policies can be bought in very specific situations, but they are too expensive for a small business to consider. The driver of key person coverage is life insurance, i.e. the business insures the life of the shareholder or employee and, should he or she die, the money realized is used to offset the effects of the disaster. The most common use is to buy out the deceased’s shares or refund capital paid into the business. This requires the business to value the individual’s contribution and insure accordingly. For an employee not holding shares, value the projects that may underperform or be lost, the likely decline in sales, and the cost of finding an adequate replacement. In both situations, you are looking to recover enough money to keep the investors and lenders happy. The last thing you want is for them to lose confidence in the business because your key employee is lost.
As everyone is looking for cheap small business insurance, the additional costs of this coverage are actually quite small. You are adding a term life policy. If the key person is relatively young and healthy, the premium will be modest. But, stepping outside the question of cheap small business insurance, you will be looking at accountancy fees to put a value on the policy and legal fees to put all the necessary paperwork in place. Just because the insurance is cheap does not mean you escape paying the professionals.