Human CapitalValuation
Key-Person Risk
Also known as: Key-man risk, founder dependency
The risk that critical knowledge, relationships, or decision-making authority lives in one person. If that person leaves, the value they carry walks out with them.
WHY IT MATTERS
Key-person risk is the buyer’s way of saying: if this person gets hit by a bus, what happens to the business? When critical knowledge, customer relationships, or decision-making authority lives in one person — usually the founder — the buyer sees a business that can’t survive without them. That’s not a business they can underwrite at full value. Key-person risk shows up in the valuation (lower multiple), in the deal structure (longer employment agreement, performance-based earnout), and in the diligence findings (deduction list entries for every function that depends on the founder). The fix isn’t a quick delegation exercise 6 months before the sale. It’s a sustained effort to distribute knowledge, formalize processes, build a second layer of leadership, and prove the business runs without the founder in the room. Buyers test this — they talk to your team, your customers, and your vendors to see who actually knows what.