Why Key-Person Risk Disproportionately Impacts Internet Businesses and How to Avoid It
One advantage of operating Internet-based businesses compared with other types of businesses is that they can function with relatively small staff-to-customer ratios. For example, while a restaurant’s waiters will struggle to manage a table of 12 people and a contracting company’s electricians can only work in one building at a time, a single software engineer at an Internet business can manage a website that simultaneously supports thousands or customers. Few other industries have the same kind of individual employee impact potential.
Since staffing is one of the biggest expenses — if not the biggest expense — for most companies, the smaller staff-to-customer ratios of internet-based businesses contribute significantly to their overall profitability profile. However, while a lower headcount is part of what makes operating an internet business appealing and profitable, it also turns a relatively uncommon problem for most companies into a big problem for internet businesses. That problem is called “key-person risk.”
Key-person risk, sometimes called key-man risk, is a scenario in which one specific person inside a company — the so called “key person” — has a role so critical to the company’s success that, if the person can no longer do his or her job (e.g. retiring, illness, death, etc.), the company would fail.
Internet entrepreneurs don’t always recognize key-person risk until they attempt to sell their companies (or raise capital) and receive valuations below what they’d anticipated. When the low valuations are explained, they’re told someone in their organization is too important to business operations. It creates a single point of failure that’s too risky. Often, that person is the entrepreneur him or herself.
This happened to me. I tried to sell a successful business only to be told that I — not the customers, revenue, or product — was the most valuable asset. By the time I figured out how to extract myself from the mission-critical roles, the business cost significantly more to operate, wasn’t as profitable, and nobody wanted to buy it.
If you don’t want the same thing to happen to you, read through my mistakes in this eBook. I discuss my advice on how to prevent them so you’ll be well-positioned to sell your Internet business when you’re ready to move on to a different project.
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