When Your Keyman Bails on You

You know your customers. You have a killer product to sell. And when you’re just starting out, you spend all your time trying to get your product or service ready, hiring people, generating sales, paying the bills and so on.  You know the ins and outs of your business like the back of your hand.

Essentially, without you, your business would fall apart because you are the key man in your business.

Within large organisations, due to high employee turnover rates, the chance of a key person leaving is high but typically quickly replaceable. In a small business however, the key man holding everything together is usually the owner or one of the founders, or perhaps even a key employee. These are the people whose absence could possibly sink the whole company.

So, what if your key person bails on you?

The first thing your business needs to do is to find a replacement and resume regular operations. Have you prepared a succession plan? Maybe you've already thought about what will happen to the business in the event of your key person’s absence or death. If not, do consider who will run it and designate that person well in advance. Nothing is more damaging to a company than a fight over control of it, but even a smooth transition can be traumatic for obvious reasons.

There are also several other factors to consider. For example, will the new key person need a buffer to get up to speed running the company? How long do you need to hire temporary help or recruit a successor? Or are there other vital employees able to replace the predecessor? All these will determine how much cost you should budget for, time required and hopefully prepare you for the eventuality when you least expect it.

Losing a key person could also mean a high turnover, and a decline in profitability and sales. Clients may refuse to do business and adopt a "wait and see" attitude until they are satisfied that the loss is not a problem that requires resolution. This is when competitors start circling in a bid to lure customers away, and in extreme cases, the loss of revenue may result in the business being forced into liquidation.

The company could have a restricted ability to transact business until a new successor is recruited. While an unpleasant thought, a wise move would be to take out life insurance policies for your key people, which is paid for through the business and is tax-deductible in Singapore. This means funds are available as a safety net in the event of the loss or absence of the key person, as all the proceeds of the policy go to the business to protect it from unexpected costs, thus ensuring continuity and protection of profits.

The loss of a shareholding director can prove catastrophic in the absence of any agreement providing otherwise, as shares held by the last key person will be passed to the key person’s named beneficiaries, and control of the business may be moved outside of the boardroom to members of the key person's family. For partners and directors, it is strongly advisable for each to take out their own life insurance policy equal to the amount of the value of their shareholding to be placed in trust, so that benefits would be paid to the surviving business partners to buy back the shares from the key person’s beneficiaries, and retain control of the company.

You never know when a crisis may hit. Insurance is seen as a contingency plan for unexpected events and even more so when the business is on the line. I understand that it is an expensive and a personal case that many may not think too much about at first, but it is very beneficial in the long run.

At St. James’s Place Wealth Management, we provide comprehensive financial planning and wealth management services, helping individuals, trustees and organisations to achieve their financial goals. For more information, please visit :https://www.sjpinsights.asia/article/a-volatile-start-for-markets/charlesedwards

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