Short answer
Often yes, but rarely on the terms the owner hoped for. A buyer prices the risk that the business falters once the owner leaves, through a lower price, an earn-out, a longer seller note, or a requirement that the owner stays on. At the extreme, when the business simply can’t operate without the owner, it may not sell at all.
How does owner dependency change the price?
Buyers pay for earnings they expect to keep. If those earnings depend on the seller’s relationships, judgement or licence, the buyer has to assume some of them will leave with him. The same profit is worth less when it is attached to a person than when it is attached to a business.
Owners often discover this as a valuation or an offer that comes in well below what they expected, with little explanation beyond “risk.”
How does it change the terms?
Usually more than the headline price. Common ways buyers protect themselves against dependency include:
- Earn-outs: part of the price is paid only if the business hits targets after closing, which shifts the risk back to the seller.
- Seller notes: the seller lends part of the price to the buyer and is repaid over time, sometimes years.
- Holdbacks: part of the price is kept back until certain conditions are confirmed.
- Owner lock-ins: the seller agrees to stay for an extended transition, sometimes two or three years.
Each one means the seller is still carrying the business’s risk after he has “sold” it. The details of any deal are for your broker, lawyer and accountant; the point here is that dependency is usually why these terms appear.
When does a business become unsellable?
When the business is the owner. If the licence that allows it to operate is held personally and nobody else qualifies, if every customer relationship is personal, or if nobody else can do the core work, many buyers can’t take it on at any price. Going to market in that state tends to confirm it publicly, which can make a later attempt harder.
Who will buy an owner-dependent business?
A competitor may buy the customer list and absorb it, which often means the business’s name and many of its people don’t survive. A private buyer may take it on with a long transition and an earn-out. Whether those outcomes are acceptable depends on what you want. Many owners care at least as much about their people and their name as about the price.
What improves the options?
Reducing the dependency before going to market. A business that can demonstrably run without its owner gives that owner more choice: more buyers, cleaner terms, a shorter transition, and the option of handing over to family or a manager instead of selling at all.
The work typically takes nine to eighteen months, and some items take longer. The Three-Week Test, a documented three-week absence, is the strongest single piece of evidence a seller can offer.
Key points
- Owner-dependent businesses often sell, but at a discount and on tougher terms.
- Earn-outs, seller notes, holdbacks and long lock-ins are common responses to dependency.
- At the extreme, a business that is its owner may not sell at all.
- Reducing dependency first widens the options, including not selling.
Related questions
- Why won’t my business sell?Usually not for lack of buyers. Usually because the business can’t show it will survive the owner leaving.
- What do buyers look for on the operating side of due diligence?Beyond the financials: the questions that decide whether a buyer trusts the business without you.
- How long does it take to prepare a business for sale?A buyer finds it in about ninety days. Fixing it typically takes nine to twenty-four months.