Know What Your Key Person Is Worth to Your Business

Here is how to calculate key person value to a business. Add up the profit the company would lose, the cost of replacing the person, and any money the business owes or must fund if that person dies or becomes disabled. The result is a planning estimate, not a formal valuation. This guide walks through the arithmetic step by step, using numbers from your own records. It’s written for owners and finance leads in Miami, Fort Lauderdale, West Palm Beach, Orlando, Tampa, and Jacksonville. The worksheet also gives you a clear starting point for a coverage review with NR CPAs & Business Advisors.

What This Estimate Is and Is Not

A key person is an owner or employee whose absence would measurably reduce the business’s revenue, profit, or ability to borrow. Key person insurance is a life or disability policy the business uses to help cover that loss. The Insurance Information Institute explains that key person coverage compensates a business for financial losses caused by the death or disability of a key employee.

The number you build here is a planning estimate. It helps you decide how much coverage to discuss, and it shows which records matter most. It is not a business valuation opinion. A formal valuation is a separate professional engagement, and this worksheet does not replace one.

The worksheet shows you the questions to answer and the math to run. The inputs must come from your company’s own records. If the numbers are wrong, the answer is wrong, no matter how clean the math looks. For a broader overview of how coverage works, read our key person insurance guide.

Gather the Five Inputs Before You Calculate

You need five inputs before you start. They are revenue tied to the person, variable costs, the person’s pay, the cost to replace the role, and any buy-sell or debt obligations.

Start with your books. Pull the income statement, payroll records, sales reports by client or product line, and any loan agreements. Use a full year of actual results, not a forecast. If the person’s role changed during that year, write down when and how it changed. A mid-year shift can distort the picture if you ignore it.

Owner pay needs special care. Many owners take a salary and then profit distributions. Separate the salary from the profit before you use any figure. If you don’t, you may count the same dollars twice, once as pay and once as profit.

Write every input down with its source. A figure without a source is a guess. Guesses make weak coverage decisions, and they are hard to explain later to a lender or a buy-sell partner.

Step-by-Step Worksheet: From Revenue to Lost Contribution

Lost contribution is the profit the business gives up when the person’s revenue goes away. You find it by subtracting the variable costs that would fall away from that revenue.

Step 1: Add up the revenue that depends on the person. This might be clients they bring in or operations they run alone. Step 2: Subtract the variable costs that would drop if that revenue stopped, such as materials, shipping, or sales commissions. Step 3: The result is the annual contribution to profits. Step 4: Decide how many years the business would need to rebuild that revenue, then multiply.

Here is an illustration with round numbers. It is not a result. Say an owner brings in $1,000,000 in yearly sales. Variable costs tied to those sales total $400,000. The annual contribution is $600,000. If the business needs two years to rebuild, the profit gap is $1,200,000. Your numbers will differ, and your loss period may be longer or shorter.

Keep one point clear. This figure is the profit the business would lose before any replacement cost is added. The next section adds those costs.

Cost of Replacement and Excess Salary

The cost of replacement is what the business spends to fill the role. It also includes the output lost while a new hire comes up to speed. That covers recruiting fees, search time, training, and the months before the new person is fully productive.

Current salary is what the business pays the person today. Ask whether the role would still need filling. If it would, the full salary is not really lost. The business still pays someone to do the work, so the gap is smaller.

Excess salary is pay above what a replacement would cost. If an owner earns well above the market rate for the same role, the business may lose less than the full salary. The reverse can also be true. A key employee paid below market may cost more to replace than the current pay suggests.

Pull replacement figures from your own hiring history and payroll records. Confirm local pay levels against offers you have made or received. Check every figure against your own numbers before you use it.

Lender, Customer, and Buy-Sell Concerns

Lenders, customers, and buy-sell partners can each turn a key person loss into a cash flow problem. Read each loan and contract directly to see what it requires.

Some lenders ask about key person coverage. Others review the loss of a principal before they renew credit. The loan agreement sets those terms. Note any clause that names a specific owner or requires notice of a change in management.

Customer concentration matters too. If one person holds most of a client relationship, that client may leave after the loss. Contract terms and renewal dates decide how much risk that carries. List your top clients and the person who manages each one.

A buy-sell agreement sets a price and a funding method for an owner’s interest. Florida law lets an individual party to a contract for the purchase or sale of an interest in a business entity have an insurable interest in the life of each other party, for that contract only. See Fla. Stat. § 627.404.

Track the buy-sell payout as its own line. Funding for a buy-sell may be larger or smaller than the key person loss figure. Both numbers matter, so keep them on separate lines.

Turning the Lost-Profit Gap Into a Coverage Amount

Add the lost contribution, replacement cost, debt concerns, and buy-sell funding to reach one planning total. That total is a starting point for discussion, not a coverage amount by itself.

The coverage amount is a business choice. It depends on the total and on what the company can afford to pay over time. A licensed agent and your tax advisor should review that choice together. That way the numbers fit both the policy and the tax picture.

Insurability is part of the picture. A fully underwritten policy requires health questions, and issue may depend on insurability. Premiums depend on that review, so this worksheet does not predict approval or a price.

Florida owners can review local context on our Florida key person insurance page. Owners in Miami and Fort Lauderdale can read those local pages too.

Bring your planning total to the coverage review. The agent and the numbers meet there.

What a Revenue Multiple Can and Cannot Tell You

No, a business is not automatically worth five times profit. Rules of thumb vary by industry, company size, growth, and risk. Treat any multiple as a rough check.

A revenue figure alone doesn’t show a business value. If a company has $1,000,000 in sales, that number doesn’t say how much profit those sales produce. It also doesn’t say how much the company would lose if one person left. Margins, costs, and customer ties decide that.

Use a multiple only as a cross-check. If your contribution-based loss is far above or below what a rough multiple suggests, look at your inputs again. A large gap is a prompt to review, not a verdict on the business.

A multiple can’t replace the worksheet. It won’t show which client relationships depend on one owner, or what replacement would cost. Those answers come from your own records.

A formal business valuation is a separate professional engagement. This worksheet does not produce one.

Ownership and Residency Questions That Change the Worksheet

Ownership shares and residence change who bears the loss and how coverage gets structured. Answer these questions before you finalize your numbers.

Ownership percentages set who feels the loss most. A 60 percent owner and a 40 percent owner may need different shares of buy-sell funding. Write down each owner’s stake and how the agreement divides the funding among them.

Florida law also sets a consent rule. A business that buys insurance on a key owner or employee generally needs that person’s written consent before the policy is bought, under Fla. Stat. § 627.404. The business also can’t retaliate against someone who refuses consent.

Owners who live outside the United States, or who hold non-resident status, raise extra questions. Coverage may need different structuring and review. The answers depend on the facts of each owner, and our licensed agent reviews those facts in a coverage review.

Entity type and state filings also shape the worksheet. A corporation, an LLC, and a partnership can keep different records and carry different obligations. Confirm each item with your filings before you use the figure.

Premium Treatment, Cash Value, and Related FAQ

Federal tax law generally excludes life insurance death benefits from gross income, but the rule has limits. Amounts paid because of the insured’s death are generally excluded under 26 U.S.C. § 101, subject to listed exceptions.

Some exceptions apply to the federal income tax exclusion for life insurance death benefits. Interest paid on proceeds the insurer holds is included in gross income under 26 U.S.C. § 101 when the excluded amount is held under an agreement to pay interest thereon. Review both with your tax advisor before you set the structure.

Whole life policies need careful reading. Keep guaranteed and non-guaranteed cash values separate in your review. Dividends, where a policy pays them, are not guaranteed. Illustrations show possible values, not promised ones.

Insurance can also reach the estate. Under 26 U.S.C. § 2042, the gross estate includes insurance receivable by other beneficiaries to the extent of the amount receivable, if the decedent possessed incidents of ownership in the policy at death. IRC § 2042 reads: “For purposes of the preceding sentence, the term “incident of ownership” includes a reversionary interest (whether arising by the express terms of the policy or other instrument or by operation of law) only if the value of such reversionary interest exceeded 5 percent of the value of the policy immediately before the death of the decedent.”

What does key person mean?

Any fee for a coverage review is disclosed before any work begins. Insurance is offered by Nischay Rawal, a licensed insurance agent in each state where the agent is licensed, separately from the firm’s accounting practice. Commission compensation is disclosed in writing before any engagement.

If losing one owner or key employee would strain your payroll or your loans, reach out to NR CPAs & Business Advisors through our contact page. We can set up a coverage review and go through your completed worksheet together.