Business Brokerage 
.
Steve Skrlac, MBA, CFA
Sales Representative
.
Hamilton / GTA / Ontario Businesses for Sale
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Selling a Business With Key Man Risk
Selling a business can be a challenging proposition in the best of circumstances. If you own a company where you are the “key person” there is an additional layer of complexity that you may have to contend with before you find a buyer.
What is ‘Key Man’ Risk?
Key person or ‘key man’ risk refers to the notion of a business that is operated by an owner (or key employee) who is instrumental to the ongoing success or viability of the operation. As a simple example, think of a business called Hank’s Electric. If the owner (Hank) built the business on personal relationships and people knowing to call him directly, that is a simple example of key man risk.
Why Does This Matter When Selling a Business?
This certainly does matter for selling a business since a new owner is going to place a lesser value on the company if the business in its current state cannot be successfully transferred to a new owner. Example – if Hank sold the business to Ivan and many customer went elsewhere, why would Ivan pay as much for that business versus a similar venture where the ‘key man’ risk might be diminished?
What is Ideal?
In a perfect circumstance, you will want to ensure that your business success does not hinge on a personality to move forward. This is an important concept not only for selling your business but also for business continuity in case of illness or even death. In other words, structure your company so that not one person is critical to it. This may require rethinking the way you interact with your clients or perhaps instituting some formal operating procedures to minimize this exposure.
The Impact on Your Business’s Value
All other things being equal, two businesses where one has taken the steps to minimize or eliminate the key person risk will be worth more than one that has not. Businesses that have addressed this issue have an easier time selling, are more attractive to buyers.
A Business Broker Can Assist You
If you’re not sure about the level of key person exposure that resides in your company, talking to an experience management consultant, business broker or potentially accountant can help to clarify the situation. An experienced business broker especially should be able to give you quick feedback on the overall company marketability and the process of how to sell a business.
Take the Time to Get it Right Before You Decide to Sell Your Business
If your business does very much rely on you for its success and you think that transferring that to a new owner may be a challenge then take the time to invest in systems and processes before you list your business for sale. The time you spent should pay off for you in the valuation and overall selling process.
What is ‘Key Man’ Risk?
Key person or ‘key man’ risk refers to the notion of a business that is operated by an owner (or key employee) who is instrumental to the ongoing success or viability of the operation. As a simple example, think of a business called Hank’s Electric. If the owner (Hank) built the business on personal relationships and people knowing to call him directly, that is a simple example of key man risk.
Why Does This Matter When Selling a Business?
This certainly does matter for selling a business since a new owner is going to place a lesser value on the company if the business in its current state cannot be successfully transferred to a new owner. Example – if Hank sold the business to Ivan and many customer went elsewhere, why would Ivan pay as much for that business versus a similar venture where the ‘key man’ risk might be diminished?
What is Ideal?
In a perfect circumstance, you will want to ensure that your business success does not hinge on a personality to move forward. This is an important concept not only for selling your business but also for business continuity in case of illness or even death. In other words, structure your company so that not one person is critical to it. This may require rethinking the way you interact with your clients or perhaps instituting some formal operating procedures to minimize this exposure.
The Impact on Your Business’s Value
All other things being equal, two businesses where one has taken the steps to minimize or eliminate the key person risk will be worth more than one that has not. Businesses that have addressed this issue have an easier time selling, are more attractive to buyers.
A Business Broker Can Assist You
If you’re not sure about the level of key person exposure that resides in your company, talking to an experience management consultant, business broker or potentially accountant can help to clarify the situation. An experienced business broker especially should be able to give you quick feedback on the overall company marketability and the process of how to sell a business.
Take the Time to Get it Right Before You Decide to Sell Your Business
If your business does very much rely on you for its success and you think that transferring that to a new owner may be a challenge then take the time to invest in systems and processes before you list your business for sale. The time you spent should pay off for you in the valuation and overall selling process.
