Owner dependence
Owner dependence is the degree to which a business’s revenue, relationships or day-to-day operation rely on the current owner personally. The more a business depends on one person, the less of it actually transfers to a buyer — which is why heavily owner-dependent businesses sell at lower multiples, and sometimes do not sell at all.
A buyer is not purchasing last year’s earnings. They are purchasing the likelihood of next year’s. Where the owner holds the customer relationships, does the quoting, or is the only person who can price a job correctly, a large share of that likelihood walks out the door on closing day.
How it shows up in diligence
- Key customers who deal only with the owner and have never met anyone else
- Pricing, quoting or estimating that lives in the owner’s head rather than in a system
- No second-in-command, and no one who could cover a month’s absence
- A trade licence, professional designation or certification held personally by the owner
- Suppliers who extend terms based on a personal relationship or guarantee
What reduces it
Owner dependence is one of the few valuation factors a seller can genuinely change, but it takes time — typically a year or more. Documenting processes, introducing a manager to key accounts, moving quoting into a system, and demonstrably taking real time away from the business all evidence that the operation runs without its owner.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Canada Revenue AgencyGovernmentSelling a business
- 02Treadstone LawLegal commentaryKey-Person Dependency
- 03Treadstone LawLegal commentaryHow to Prepare a Business for Sale in Ontario
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