How to Minimize the Impact of Losing a Key Employee

Jerry Sloan recently resigned as head coach of the Utah Jazz. His resignation was a surprise. He was with the Jazz organization for 26 years and was the longest tenured coach in all of America’s professional sports. What does Sloan’s resignation mean to the Jazz organization? What will the impact be from losing him? In any organization, the loss of a key person can have a devastating impact on the organization and its value.

Let’s look at the loss of a key person in a business. A company and its employees may find themselves in uncharted waters without the know-how or relationships to keep the business going due to the retirement, death or disability of a key person. When this happens, the value of the organization takes a nose dive.

Imagine for a moment you own a business that supplies components to the largest manufacturer in town. You worked for years developing a personal relationship with the owner, Bob Smith, and his company makes up 95 percent of your annual sales. If you died tomorrow, could your business survive? Does anyone else in the company have a relationship with Bob?

The loss of a key person isn’t limited to relationships with customers. It also can include someone who has unique relationships with suppliers or who is exceptionally skilled in negotiations, technology, management, or is a visionary.

The loss of a key person negatively impacts the value of the company. The U.S. tax court understands this. When Paul Mitchell who was considered a key person in his organization died, the court allowed a 15 million dollar discount off of the enterprise value of John Paul Mitchell Systems stock.

How can you offset the negative impact of losing a key person in your organization? Here are some ways you can lessen the impact: First, decrease your dependence on the key person. This means training. By having the key person teach someone else his or her skills will be beneficial to the organization. Second, purchase life and disability insurance on the key person. By having an insurance policy, you will have money to find and pay for a replacement in the event of death or disability. Third, relationships with suppliers and customers should involve more than the key person. Instead of just having the key person build relationships, have a number of employees routinely visit with suppliers and customers. Fourth, have all employees sign employment and non-compete agreements. This will give you a level of protection in the event a key person wants to work for a competitor or start up a business to compete against you.

Jerry Sloan will be missed by many Jazz fans. He is truly a key person to the Utah Jazz organization. How big of an impact will the loss of Jerry Sloan be to the Jazz? Only time will tell.