What is key person risk when buying a business?

Every small business carries some of this, and the question is never whether it exists but how much of the earnings would walk out of the door with one person. The answer is rarely in the financial statements, which is exactly why buyers miss it.

Where to look for it

Concentration in the customer base is the obvious test — if three clients are half of revenue and the owner personally holds all three relationships, the risk is the owner, not the clients. Less obvious: who knows how the pricing works, who holds the supplier relationships, who can actually do the skilled work, and whose name is on the licence or certification the business operates under.

A licence held personally is a hard stop, not a risk

In regulated trades the business may operate under a certification held by the owner as an individual. That does not transfer with the assets. Establish early whether the business can legally continue the day after closing without that person, because no amount of transition support fixes a licence you cannot hold.

What actually reduces it

A transition period with the seller working in the business, documented processes rather than knowledge in one head, introductions to every material customer and supplier before closing, and retention arrangements for staff who hold critical knowledge. Where meaningful earnings depend on the seller, structuring part of the price as an earn-out or vendor take-back aligns their interest with the handover actually working.

It belongs in the price, not only in the plan

Businesses with high key person dependency trade at lower multiples, and reasonably so. If diligence shows the owner is the business, the response is to reprice or restructure rather than to hope the transition goes well. Lenders take the same view — some will require key person insurance as a condition of financing.