How to prepare for losing a key member of staff

The loss of a crucial employee can have severe consequences.

by Rebecca Smith
Last Updated: 25 Jan 2016

All employers dread the moment an important member of staff hands in their notice, but it’s a problem all businesses will have to deal with at some stage. There are of course different reasons for losing an employee - resignation is the most common cause, but none of us are immune to serious illness or even death.

The risk is particularly severe for small businesses. Losing a key team member can have a serious impact on your ability to continue operating, and even be fatal to a firm’s future.  

As an entrepreneur, the odds are you’ll already have enough problems to deal with on a day-to-day basis. Simon Claxton, MD of boutique insurance brokers Macbeth’s Financial Services, says he often notices small firms don’t get round to preparing for the loss of an important employee.

‘It’s surprising as they will insure all liabilities, from desks through to premises, but sadly, they don’t move on from there and think about the people within their business, and how, the loss of a key individual can contribute to their business failing,’ he warns.

Assess your position

The value certain employees bring to a firm can be substantial, which makes it even more crucial to consider how you might cope without them. Simon Bloch, a partner at Knights Professional Services, says an important starting point is to make sure you’re aware of each individual’s worth to the firm. ‘Long-standing members of staff often have historical knowledge about the firm, clients and partners that can be invaluable to smaller businesses,’ he says.  

‘It’s really very simple,’ Claxton agrees. ‘Look at your business plan and structure and identify the individuals that have a dramatic effect on profitability and day-to-day running of the business.’ Whether it’s permanent or temporary, look into potential replacement costs, but not just in terms of profit or turnover.

‘Think about how things like goodwill, contacts and relationships, technical ability – look at covering that value,’ he adds. ‘There are several ways to calculate the value, so a percentage of income, multiples of salaries; it’s not an exact science but it’s really essential.’

Get your paperwork in order 

Think about the robustness of your employment contracts and whether they’ll look after the business enough if an employee decides to leave. ‘This would require a consideration of whether there is sufficient protection in terms of adequate notice provisions, gardening leave and post termination obligations, such as a restrictive covenants and using confidential information after the end of their employment,’ Bloch adds.

In terms of day-to-day operations, make sure you don’t have situations where staff are working in silos. ‘People in client-facing roles shouldn’t be given exclusive contact with the client, so if one of them leaves someone else already has a relationship with the customer,’ says Toby Ryland, corporate tax partner at HW Fisher & Company, adds.

When it comes to planning for more serious matters of serious illness and death, employers can be even more unprepared. Recent research from financial services provider NFU Mutual found that while 70% of small businesses owners said they were particularly concerned about losing a team member, 85% didn’t insure against the risk of losing a key employee to critical illness or death. If you can afford it, key person insurance is one way for firms to better prepare for the loss of an individual – providing life insurance on people critical to the firm.

Richard Kateley, head of specialist protection at Legal & General, says there’s an additional consideration – your shareholder agreement. ‘If the key person is a shareholder, what happens to their shares in the event of their death should be defined in their will,’ he says. ‘If one neglects to disclose this information their assets may go to probate which could leave the company without a decision maker for several months.’

Don't ignore the emotional impact

Regardless of circumstances, the absence of a key member of personnel can also have a knock-on effect on morale. ‘With illness or worse, depression, feelings of pressure and stress can be a feature within the business,’ Claxton points out.

Exploring the range of employee assistance programmes out there which offer counselling and support should make you better placed to deal with the difficult personal effects of losing a member of staff. ‘In terms of cushioning this, businesses need to have the financial ability to go out there and find a replacement for the business to maintain its commercial viability,’ says Claxton.

Losing a member of the team will usually be felt more acutely in a small business environment than in a larger firm, so a well-prepared, prompt response is important to prevent it causing bigger fractures in your firm. ‘Nothing can take the place of genuine, human leadership at these times,’ Claxton says simply. ‘If you lose that, a business can turn very quickly.’

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