Andrew Carnegie, one of the greatest American industrialist in the 20th century, was asked, ”What do you attribute you success to?” He answered, “Take from me all the ore mines, railroads, manufacturing plants and other physical assets, but leave me my organization, and in a few years I promise to duplicate the Carnegie company.”
The success and growth of a business often depends on the personal contribution of key employees. The loss of a key employee’s services due to death or disability will usually result in some form of financial losses as follows:
If you are a business owner, protecting business interest from the financial loss of key employee is certainly one critical issue you do not want to overlook in wealth preservation. In this article, I would share on various issues of key employee loss in relation to wealth preservation.
Most often, key employees possess several characteristics distinguishing then from other employees, including the following:
In reality, identifying the key employee might be more difficult than it seems. The term “key employee” is not necessary limited to employee of the company only. It may include business owner employee as well. In the initial operation of any business, the owners usually play a important role in building the business and can be classified as key employees.
There are a few things that could happen to key employees that would result in financial losses to the business: –
As such, a proper wealth preservation planning to protect business interest is to manage the risks and losses incurred in any of the above events.
Putting a dollar on a key employee’s contribution to the business is even more speculative than valuing the business itself. The actual valuation method used is very much dependent on the characteristic of the key employee that makes employee “key” to the business; for example, “a sales manager who has substantial impact upon sales or a financial officer who has access to credit.”
Four of the most commonly used methods are as follows:
The task of evaluating a key employee’s worth to a business will always require some form of discretion and therefore can never be totally precise and accurate.
In an idealistic world, the best solution would be getting immediately an equally competent replacement for the same compensation package. But the question is, “Is it realistic?” Of course not! In the real world, the real solution to the problems is to have timely cash to do the following:
The followings are several funding sources to address the loss of key employee:
One of the classic judgments of key-employee insurance came in a 1951 U.S. Court of Appeals 3rd Circuit case, The Emeloid Co., Inc. v. Commissioner, where Justice Joseph Staley Jr. wrote, “What corporate purpose could be more essential that key-employee insurance? The business that insures its buildings and machinery and automobiles from every possible hazard can hardly be expected to exercise less care in protecting itself against the loss of two of its most vital assets – managerial skills and experience.”
Due to the fact that the loss of key employee results in significant loses to a business, your wealth preservation would not be complete without taking care this issue effectively. So, consult the relevant professional to place a value on your key employees. Then find an independent financial professional you trust to identify the proper funding for timely cash in the event of the key employee loss.
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