Key Person Risk in Commercial Underwriting: A Borrower’s Guide

01

Identify who is truly critical to repayment

List the people whose absence could materially affect sales, production, licensing, customer retention, supplier access, financial controls, regulatory compliance, or strategic decisions. Include owners and guarantors, but also nonowner employees with specialized credentials, technical knowledge, estimating authority, dispatch control, purchasing relationships, or customer trust. Explain what each person does, which tasks only that person can perform, and how long the business could operate without a replacement.

02

Quantify the financial exposure

Connect each dependency to revenue, gross margin, backlog, collections, payroll, vendor terms, and debt service. Measure the share of sales originated or managed by the person, contracts requiring that person’s license or approval, projects dependent on specialized expertise, and costs of temporary coverage or recruitment. Avoid unsupported percentages. Reconcile the analysis to customer reports, payroll, organization charts, contracts, and historical results so the lender can distinguish a manageable transition from a threat to repayment.

• Requested amount and use of proceeds
• Historical and current financial statements
• Complete debt and ownership schedules
• Collateral and transaction documentation

03

Document management depth and decision authority

Provide an organization chart with names, tenure, responsibilities, signing authority, compensation, credentials, and reporting lines. Show who can approve payments, access systems, communicate with lenders, manage key customers, supervise operations, and sign regulated documents if the primary person is unavailable. Dual controls should protect cash and sensitive information without making ordinary operations depend on one individual. Board, member, or shareholder resolutions should align with actual practice and entity documents.

04

Turn undocumented knowledge into operating procedures

Create current procedures for quoting, scheduling, purchasing, billing, collections, payroll, compliance, quality control, customer service, and emergency decisions. Maintain secure access inventories for banking, accounting, contracts, insurance, licenses, domains, software, facilities, and critical equipment. The objective is not to expose credentials in a loan package, but to demonstrate that authorized successors can locate records, follow controlled processes, and keep the business operating.

05

Build a practical succession and temporary-absence plan

Separate short-term continuity from permanent succession. A temporary plan should name interim authority, communication steps, payroll and vendor controls, and outside resources. A permanent plan should address leadership selection, ownership transfer, estate or buy-sell provisions, valuation, funding, licensing, and the timeline for recruiting or training. Confirm that the plan is legally consistent with operating agreements, shareholder agreements, trusts, employment agreements, and applicable professional or regulatory rules.

06

Reduce relationship concentration

If customers, referral sources, vendors, landlords, franchisors, or public agencies primarily interact with one person, introduce additional authorized contacts before a disruption. Centralize contracts, contact history, pricing, renewal dates, service commitments, and open issues in company-controlled systems. Review assignment, change-of-control, key-person, termination, and notice clauses. A lender may view a transferable, documented relationship differently from revenue based mainly on personal goodwill.

07

Evaluate key person insurance carefully

Life or disability insurance can provide liquidity for debt reduction, recruitment, ownership transition, or operating costs, but it does not replace management capacity or guarantee that customers remain. Confirm the insured person, owner, beneficiary, coverage amount, exclusions, term, premium source, assignment, and lender rights. If the lender requires collateral assignment, understand how proceeds are applied and what remains available to the company or estate. Qualified insurance, legal, tax, and estate professionals should review the structure.

08

Address ownership, guarantees, and transfer mechanics

Explain what happens to voting control, management authority, guarantees, pledged equity, and ownership interests upon death, disability, departure, divorce, dispute, or transfer. A guaranty may remain enforceable under its terms even when a person no longer manages the business, while a transfer may require lender consent. Identify buy-sell funding, redemption obligations, seller notes, estate liquidity, minority protections, and any debt that competes with the proposed lender for cash flow.

09

Stress-test the forecast without the key person

Build a monthly downside case that reflects slower sales, customer attrition, project delays, temporary management expense, recruiting fees, higher compensation, insurance timing, working-capital pressure, and transition costs. Show available cash, borrowing capacity, reserves, and owner support without double-counting restricted funds. Calculate debt-service capacity under the lender’s definitions and explain the operational actions that would be taken at each stage rather than relying on a single optimistic replacement date.

010

Maintain the continuity file through closing and beyond

Prepare one dated package containing the dependency analysis, organization chart, resumes, licenses, procedures inventory, succession summary, insurance evidence, ownership documents, customer and supplier context, and downside forecast. Track open items and update departures, new hires, expired credentials, ownership changes, insurance, major contracts, and lender notices through closing. PFCS can help organize the financing package and coordinate information with third-party capital sources, but the lender and qualified advisers determine acceptable mitigation, collateral, guarantees, approval, and final terms.