Owner dependency: why buyers pay less and how to fix it

When a buyer looks at a founder-led business, one of the first questions is what happens to it when the founder leaves. If the honest answer is that customers, staff and decisions all run through one person, the buyer is taking a risk they cannot fully diligence. They price that risk into the deal.

How buyers price owner dependency

Buyers rarely say "we are knocking a turn off the multiple because of you". The discount shows up in the structure instead:

• A lower headline multiple. The buyer treats earnings as less certain, so they pay less for each pound of profit.
• More deferred consideration. A larger share of the price is paid as an earn-out or deferred payments, so the seller carries the risk that performance drops after completion.
• A longer handover. The owner is tied in for two or three years, often on terms that make the earn-out depend on things they no longer control.
• Tougher warranties and indemnities around customer retention and key staff.
• Fewer buyers. Private equity in particular will often walk away from a business with no management team, which reduces competition in the process.

For the seller, the combined effect is less cash at completion and more of the price at risk.

What buyers look for in diligence

Buyers and their advisers test owner dependency in fairly predictable ways:

• Customer relationships. Who holds the top ten accounts? Have those customers met anyone else in the business?
• Decision-making. Can anyone other than the owner approve pricing, sign off a hire, or commit spend?
• Management depth. Is there a finance function beyond a bookkeeper? Is there someone running operations?
• Knowledge. Are the processes, technical know-how and supplier terms written down, or held in the owner's head?
• Track record. Has the business traded well during a period when the owner was absent?

The last point is the one that is hardest to fake. A management team that has run the business through a full financial year is much stronger evidence than an organisation chart drawn up for the information memorandum.

Reducing dependency before a sale

The practical fixes, in rough order of impact:

1. Appoint a managing director or COO who takes over day-to-day running. This is the biggest single change a buyer will notice. We cover the details in hiring a managing director to step back.
2. Build a proper finance function. A qualified finance director or financial controller who produces monthly management accounts and can answer diligence questions. Buyers get nervous when the owner is the only person who understands the numbers.
3. Transfer customer relationships. Introduce account managers or the new MD to key customers, and move the day-to-day contact across well before a sale.
4. Document the business. Processes, pricing logic, supplier arrangements and technical knowledge.
5. Tie in key people. Share options or retention arrangements for the managers the buyer will depend on, put in place before the sale rather than during it.

How long it takes

Most of these changes need 18 to 36 months to show up in a way a buyer will credit. A senior hire needs time to be recruited, settle in and produce results that appear in the accounts. Starting when a sale is already under way is usually too late to change the price, although it may still help the deal complete.

Our family business succession page sets out what each hire proves to a buyer and how the timeline works back from the exit.