Key Employees and Building and Protecting Business Value
Key Employees: One of the Most Important Drivers of Business Value
When business owners think about increasing the value of their company, they often focus on revenue growth, profitability, systems, or customers. Those are all important. But one of the most significant drivers of business value is often sitting just down the hall.
Your key employees.
These are the people whose leadership, knowledge, relationships, and performance help your business grow and, just as importantly, make it less dependent on you. In many businesses, they are among the company's most valuable assets.
While every employee contributes to the success of the business, key employees typically share one or more of these characteristics:
They make a substantial contribution to the success of the business.
They possess critical knowledge or expertise that would be difficult to replace.
They maintain important customer, vendor, or industry relationships that are essential to the company's future.
As we help business owners prepare for an eventual transition, we emphasize that key people are one of the most important value drivers in a transferable business.
Whether your goal is to sell to a third party, transition the business to family members, complete a management buyout, or simply build a stronger company, your key employees will play a central role in achieving that outcome.
Two Ways to Think About Key Employees
We find it helpful for owners to think about key employees in two categories:
Building Business Value
Protecting Business Value
Both are essential.
Building Business Value
A business becomes more valuable as it becomes less dependent on its owner.
One of the most effective ways to accomplish that is by developing key employees who can assume greater leadership responsibility, make important decisions, manage customer relationships, and consistently produce results without requiring the owner's daily involvement.
The strongest management teams don't simply keep the business operating. They help it grow.
That's why owners should intentionally align the goals of their key employees with the long-term exit goals of the business. If your objective is to increase enterprise value over the next five years, your key people should understand that objective and have measurable responsibilities that contribute directly toward achieving it.
Just as important is creating incentive plans that reward both performance and retention. Well-designed incentive compensation can encourage key employees to think like owners, remain committed during critical growth years, and stay engaged throughout a future ownership transition.
Protecting Business Value
The other side of the equation is risk management.
The more valuable a key employee becomes, the greater the potential impact if that individual unexpectedly leaves.
The risks are significant:
A competitor hires them away.
They solicit customers or employees after leaving.
Confidential information or trade secrets are exposed.
The business loses important relationships that were built around that individual.
An unexpected death or disability creates operational and financial disruption.
Replacing a truly exceptional employee can be expensive and time-consuming. Recruiting, training, rebuilding customer confidence, and recovering lost productivity can all reduce the value of the business at precisely the wrong time.
That's why protecting business value requires just as much attention as building it.
Owners should regularly review employment agreements and other key legal documents to ensure they appropriately address confidentiality, ownership of intellectual property, non-solicitation provisions where enforceable, and other protections appropriate for the business. (For more on this topic, listen to ExitReadiness® PODCAST Episode 43 with attorney Marc Engel.)
In addition, businesses should evaluate whether key person life and disability insurance is appropriate. These policies can provide much-needed financial resources if the unexpected occurs, helping the company recruit a replacement, stabilize operations, and protect enterprise value. (For more on this subject, listen to ExitReadiness® PODCAST Episode 192 with Mark Gage of Northeast Brokerage.)
ExitReadiness® Means Being Intentional
Business owners sometimes assume their best employees will simply stay.
That's a risky assumption.
The businesses that create the greatest value intentionally recruit, develop, reward, protect, and retain their key people. They recognize that their leadership team is not simply an operating expense—it's a strategic asset.
If your goal is to exit your business on your own terms, your key employees deserve as much planning attention as your financial statements, customer relationships, and growth strategy.
Because when the right people are in the right roles—and properly aligned with your long-term objectives—they don't just help build a better business.
They help build a business someone else will want to own.
