Critical Advice for Businesses Making Less Than $10M | Ep 805
episodePreviously titled “Critical Advice for Businesses Making Less Than $10M | Ep 824” — renamed by the publisher on Aug 2, 2026
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What is key man risk and why is it important for businesses?
Welcome back to the game. Business owners making less than $10 million per year cannot afford to make this mistake. And it's a problem that limited me and my ability to sell my company. And there's four parts to this mistake, and it starts with something that I like to call key man risk. If a single person is vital to how your business operates and if they were gone, the business would cease to be able to exist or be able to be as profitable as it is with that person. And so this key man risk can exist at the founder level. So it might be you, like if your business, if you leave for two months, which by the way is a great test of this, If the business cannot sustain its level of productivity, like if all of a sudden the sales go to zero, or they cut in half because you're the only good closer, or all of a sudden you're not even getting leads because you're the only good marketer, or because the product can't be delivered because you're the only person who knows how to do it, right?
In each of these situations, there's key man risk. And that can be, of course, you, the owner. In the beginning, it's more common that it's you. And then over time, that key man risk can be an employee who works for for you. It's just as dangerous for a public company that has an employee who has zero stock in the business, who happens to own all the passwords, for example, to every single dedicated system. Like if that person leaves, it could do material damage to the business. you've got these functions that occur in the business on a regular basis. And there may be multiple people that can do these functions. And so the opposite of key man risk is redundancy, meaning if one of these people disappear, we still have a flow for, let's say, dollars to go across this bridge. It can still kind of make its way through. All right, so let me tell you a story. So... One of the key man risks that existed in gym lunch, and we had multiple. So the thing is, is that this can happen at any function.
So this could happen on the marketing side. If only one guy knows how to generate leads or if that person left, you would get half the leads or a third of the leads, that would be key man risk. If only one guy knows how to sell like you and that guy closes 80% and no one else can close 20, that would be material. That would be key man risk. If only one person can do the delivery, that would be key man risk. And so I'll give you an example of the delivery. And so when I had Jim launch, I was kind of the innovator of the product and the service. I came up with the solutions for the Jims. And so for an acquirer or a private equity firm who wants to buy this business, or whoever else you might want to sell a business to,
Having one person, especially if it's the person who's going to leave when the business is sold, is a huge, massive red flag for them because they're like, wait, we're buying this production, but it's with this key cog in the machine and you want to have us buy this thing and remove the cog. Now, in a situation where you raise money, for example, it's not as much of an issue because those people, those pieces, those cogs are still in the machine. If you wanted to sell a company and you own the company and you leave and all the people who are still key men remain within the business, then what they're going to do is try and incentivize those people to stay, but it still makes the company sellable. So this just counts double if it's the owner or somebody who's going to leave as a result of a transaction.
is the key man risking any of the functions of the business? So I was key man in the delivery. And so I did a couple things to solve the problem. So number one is that I created a department called the R&D department. And so the way it worked was simple. I thought about the process that I would go through when I wanted to innovate the product. So I'd say, okay, what can we do for our gym owners that will help them generate more leads, make more sales, whatever the issue was. And so the first thing that I did was that I would say, okay, I have a way of identifying problems. I would ask the customers, and the nice thing is if you listen to your customers, they will shout at you, and they will tell you exactly what their problems are.
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