Glossary·Written by a CPA
Key-person risk
Also called: Key-man risk
The risk that a company depends so much on one person that losing them would hurt the business.
Key-person risk is what you take on when one founder or CEO is the strategy, the relationships and the reason customers and employees stay. All that I mean is the business might not run the same without them.
Companies sometimes disclose it in the risk factors of their 10-K, and boards manage it with a succession plan and a bench of senior leaders.
For you, the catch is that the market tends to price it in all at once on a headline, before anyone knows whether that person is actually leaving.
Example. As an example, if analysts think a stock would be worth about 25% less without its CEO, and the market prices in a 25% chance that the CEO leaves, roughly 6% of the stock price is resting on that one question.
The catch. Look for a named successor, how many people report directly to the CEO, and whether the board says anything about succession.
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This is education, not tax or investment advice. I'm a CPA, but I'm not your CPA. Full disclaimer.