Key person risk is the degree to which a business’s performance depends on one or two individuals, and the discount a buyer applies to account for the probability that performance declines when those people are no longer there.

In most owner-managed businesses, the owner is the key person. They hold the most important client relationships, make the most significant decisions, possess the deepest institutional knowledge, and often generate a disproportionate share of new business. That dependency has real financial consequences: lenders require key person insurance as a credit condition, and buyers apply a multiple discount that reflects the risk that the revenue and earnings being acquired will not survive the owner’s departure.

Key person risk is reduced through the same initiatives that build human capital: developing managers who hold relationships independently, documenting knowledge and processes so they live in the business rather than in one person’s head, and gradually transferring authority and visibility so that clients and employees relate to the organization rather than to the individual.

Key person risk is the most common and most directly addressable valuation discount in owner-managed businesses. See how Wefinx approaches value growth.

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