Key Person Risk: When One Person *Is* the Business

1. What Key Person Dependency Really Means

Key person risk isn’t just about the owner doing too much. It’s when critical operational knowledge, revenue generation, or customer trust lives in one human’s head.

Example:
A dental practice with $1.2M revenue relies on Dr. Smith for every procedure. Patients don’t care about the business — they care about him. If he retires, 80% of patients disappear.

Why it matters:

• It makes the business hard to transfer.
• It scares lenders.
• It creates operational chaos post-close.

If the revenue walks when the owner walks, it’s not a business. It’s a paycheck with branding.

Your move:
Map the business’s “brain.” Who makes sales, who runs ops, who customers trust. If the answer keeps pointing to one person, flag it.

2. When “Runs Itself” Is the Biggest Lie in the Game

Sellers love to say, “It basically runs itself.”
But dig a little deeper, and that usually means:

• They handle every escalation.
• They sign every contract.
• They manage all key relationships.
• They’re the walking SOP.

Example:
A commercial cleaning company claims the owner only works “a few hours a week.” In reality, she’s the only one who manages client relationships, schedules, and bids. If she steps away, there’s no company — just a bunch of confused cleaners.

Why it matters:

• Buyer inherits burnout work.
• Scaling becomes impossible without replacing that person.
• Lenders treat this like a job purchase, not a business acquisition.

Your move:
Request a detailed org chart, role breakdowns, and task lists. If they can’t provide them, that’s your red flag.

3. Stress Test the Operation Without the Key Person

A good business survives when someone takes a vacation. A bad one falls apart by lunch.

Example:
A pool service route shows $400K SDE. The owner is the only licensed tech. If he’s gone, no one else can legally operate.
Result: no service = no cash flow.

Your move: Ask: “What happens if [key person] disappears for 30 days?”. If the answer involves panic, scramble, or magic, that’s dependency. Push for documented processes, cross-training, or transitional agreements.

Bonus tip: This is one of the fastest ways to flush out BS in a seller interview.

4. Price or Structure Around It

Key person dependency doesn’t always kill the deal — sometimes it just lowers the price or reshapes the structure.

Example:
A local construction company with a strong brand but one superstar owner-operator. He’s willing to stick around 12 months post-close to train a GM. That’s risk, but also structure-able.

Your move:

• Negotiate an earnout or holdback tied to retention or handoff.
• Bake in a transition period with clear responsibilities.
• Hire or identify the replacement before closing.
• Adjust valuation to reflect dependency risk.

Lenders actually like seeing realistic transition plans here. It shows you understand the fragility.

5. When to Walk

Some dependencies are too deep to fix.
If the business exists entirely in one person’s head and there’s no way to replicate it fast — you’re signing up for disaster.

Example:
A boutique software agency’s founder writes all the code, manages every client, and holds every relationship. There’s no documentation, no second-in-command, no plan. Once they’re gone, so is everything.

Your move: If there’s no backup, no SOPs, and no willingness to transition, walk. If the entire business is one person’s personality, it’s not an acquisition. It’s a landmine.

Bottom Line: You Don’t Want to Be the New Key Person

A real business can run without its founder.
If you have to become the founder just to keep it alive, you’re not buying a company — you’re buying their job.

• Map the risk early.
• Stress test ruthlessly.
• Price or walk accordingly.

Disclaimer