How does key person dependency affect the sale of my business?

Key person dependency means the business relies on one person, such as the owner, for relationships, decisions or know-how. In BDC’s guidance on negotiating a sale, buyers assess risks that include customer concentration and key employee reliance, and one question is how easily the business can operate without the current owner. BDC says strong management teams, documented processes and clear systems increase value. It also says that by having pristine records, documented processes and a strong team, a seller minimizes the reasons for price reductions.

What a buyer will ask

BDC’s due diligence guidance asks: when the vendor leaves, do the customers leave too? Who actually runs the business day to day, the vendor or key employees who will remain after closing? It adds that a buyer may need to meet key employees to learn their roles and whether they see themselves continuing. Prepare answers you can support with names, roles and records, rather than assurances.

How it can show up in the deal

BDC’s guide to the steps of buying a business lists the current owner’s importance to the business and their willingness to stay and help with the transition among the areas a buyer may look into during due diligence, and reliance on the current owner among the factors the final price is based on. It says the purchase agreement will include an employment agreement if the seller will remain for a transition period. BDC’s due diligence guidance groups vendor involvement with key employees, vendor financing and earnouts as one topic. These are agreement terms, so a lawyer should draft any of them for your situation.

What you can do before you list

Ask yourself which customer relationships run only through you, and which decisions only you make. Then give those jobs to named employees and write down the procedures behind them. See owner dependence for the term and how to reduce it. BDC’s due diligence guidance suggests a buyer consider how to keep key employees, such as employment contracts with incentives to remain, so ask your accountant and lawyer before offering any retention arrangement yourself.