Is it fair to discount the price for owner dependency?

A business is owner-dependent when customers, supplier relationships or know-how sit with one person. A buyer who cannot replace that person is taking on the risk that the business changes once the owner leaves. BDC’s guide to buying a business says the final purchase price is based on factors that include reliance on the current owner. So a buyer who raises it is raising a recognised point, and the question becomes how large the effect is.

What BDC says moves price

BDC’s guidance for sellers asks how easily the business can operate without the current owner. It says strong management teams, documented processes and clear systems increase value, and that lower perceived risk typically equates to higher value. It also says anything not up to par is an opportunity for a buyer to start creeping down the price. There is no formula in these sources for converting dependency into a dollar amount.

Questions that show how dependent it is

BDC’s due diligence guidance poses questions a buyer can put to the seller. When the vendor leaves, do the customers leave too? Who is actually running the business day to day, the vendor or key employees who will remain after closing? BDC suggests meeting key employees to learn their role and whether they see themselves continuing. The answers give the buyer facts to negotiate with, which is firmer ground than a general feeling that the owner matters.

Ways other than a lower price

BDC 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. It also describes two structures that tie part of the price to events after closing. Vendor financing holds back a portion of the price as a debt to the vendor, and an earnout pays part of the price after closing under contractual clauses. Whether either suits a given deal is a matter for the parties and their advisers.