Brillian asks about "key person risk" as part of understanding your business. Here's what it means and why it's part of your valuation.

Key-person risk is the risk that a business's performance depends heavily on one or a few individuals — often the owner — such that their departure, injury, or death would significantly disrupt operations.

It's a life or disability policy a business takes out on a key individual. If that person becomes unable to work, the payout goes to the business to help cover the cost and disruption of the transition.

Buyers and appraisers view businesses that depend heavily on one person as riskier and harder to transfer — which typically means a lower valuation multiple. Having capable managers who could run things in your absence, or key person insurance in place, mitigates that risk and supports a stronger valuation.

A few questions gauge how dependent the business is on you — could managers keep it running? Is anyone irreplaceable? — and whether insurance is in place as a mitigant. Reducing key-person dependence — whether through delegation or insurance — is one of the more direct ways to build lasting, transferable value.