What do buyers look for when a business depends on one person?

If a business depends on one person, part of what a buyer pays for may leave with the seller. The concern is narrow: what happens to revenue, relationships and operations once the owner steps back. BDC’s guidance for sellers treats it as a preparation issue and tells owners to make sure the business does not rely on their presence to keep functioning.

A team that can run the business

BDC advises owners to fill human resources gaps, especially in the management team. Read from the buyer’s side, that raises the questions of who makes day-to-day decisions, who holds the key skills and whether anyone could take the owner’s place.

Processes that are written down

BDC says to document and update standard operating procedures so operations are more easily transferable to a new owner. Written procedures turn what the owner knows into something a buyer can inspect and a successor can follow. Our glossary entry on owner dependence describes the same risk from the valuation side.

Relationships that are not personal

BDC also advises addressing supplier or customer concentration and, where that is not possible, thinking about ways a buyer could mitigate it. Where a major customer deals only with the owner, the two risks overlap. The transition plan BDC suggests working out with the buyer includes a timeline for transferring responsibilities and information, a plan to retain employees, customers and suppliers and to communicate with them about the change, and, among the things given to the new owner, introductions to suppliers.

Terms that bridge the gap

An owner’s continued involvement can be written into the deal. BDC lists vendor financing, an earn-out, a phased transfer of ownership and a role as executive, board member or advisor as ways to remain involved after a sale. In Ontario, the Employment Standards Act, 2000 prohibits an employer from entering into a non-compete agreement with an employee. That does not apply to an agreement made as part of a sale of a business that prohibits the seller from competing with the purchaser’s business after the sale, if the seller immediately becomes the purchaser’s employee, and the Act has a separate exception for executives. If part of the price is paid over time, the CRA says a capital gains reserve may be available.