Key person risk is the extent to which a business depends on one individual continuing to be there.
Where it concentrates
Customer relationships held by one person. If customers deal with the owner rather than the business, they follow the owner.
Technical capability nobody else has, particularly where one person holds the licence the business operates under.
Knowledge that was never written down: pricing judgement, supplier arrangements, how particular jobs are approached.
Authority. Where every decision routes through one person, their absence stops the business rather than slowing it.
Why it is worth measuring
It is the largest single factor in what a business sells for. A business that cannot run without its owner is selling the buyer a job rather than an asset — see business valuation and exit planning.
And it is the exposure with no insurance against most of its consequences. A policy can replace income; it cannot replace the relationships or the knowledge.
Reducing it
Write down what only one person knows. Pricing method, supplier terms, the approach to recurring job types.
Introduce customers to someone else, deliberately and early, so the relationship is with the business.
Distribute licences and certifications so more than one person can carry the required qualification — see training and certification.
Give decisions away with stated limits, so ordinary matters do not wait.
Each of these takes months to a year, which is why it is started long before it is needed.
Insuring what can be insured
Key person life and disability cover pays the business rather than the family, and is intended to fund the disruption: recruiting a replacement, lost trading, and any buyout obligation under a buy-sell agreement.
The same risk with customers
Concentration on one customer behaves identically and is measured directly — see customer concentration.