Why You Won’t Get A Check And Walk Away: The Negative Effects of Owner Dependence On Business Valuation and the Sale Process, and Steps You Can Take To Mitigate Them.

“A business that can’t run without its owner is a business with a deadline.” – Guy Rigby

Owner dependence can have detrimental effects on a business. When day-to-day operations rely heavily on the owner, it often diminishes the company’s valuation, particularly when the owner chooses or is compelled to sell to an unrelated third party.

Both academic and non-academic research regarding mergers and acquisitions of businesses demonstrates that owner dependence is one of the most important factors in the valuation and marketability of businesses. It is, however, one of the most difficult factors to quantify, primarily because of the varying perceptions of risk by different buyers. It’s also important to realize that much of the value in an owner-dependent business is destroyed when the owners depart abruptly, whether this is due to illness or a planned sale of the business.

Unfortunately, many business owners envision a breezy transition to retirement in which they simply hand the keys over and their buyer will deal blithely with all of the risks that the future holds. In fact, according to Forbes and the Exit Planning Institute, the success rate for selling a small business is only 20%. That means one in five of those who want to sell will actually succeed in selling their businesses.

By reducing your business’s dependence on you, you not only increase its value but also enhance its marketability and improve the likelihood of securing a favorable deal structure.

Why do so few business owners who want to sell actually sell?

There isn’t a single reason owners struggle to sell their businesses; however, in our experience, the most common cause is that their company is a “knowledge-intensive firm” (KIF), and they have not established effective systems to transfer that critical knowledge to a buyer.

When most people think of a knowledge-intensive firm (KIF), they picture businesses that require extensive training or specialized expertise, such as law firms or accounting practices. However, in smaller companies, particularly those with fewer than twenty employees, there often exists a vast amount of unwritten, uncodified knowledge that lives in the minds of the owners and key employees. This knowledge goes far beyond operational processes; it encompasses sales strategies, customer and employee relationships, company culture, the idiosyncrasies of equipment, training methods, and many other critical aspects of the business.

In essence, the value of a knowledge-intensive firm (KIF) lies in its human capital rather than in land, money, or other physical assets. These companies derive their competitive advantage by transforming the knowledge and expertise of their owners and key individuals into intellectual capital. The output of that intellectual capital is realized through customers, relationships, and sales. However, if there is no reliable mechanism to transfer this knowledge to a buyer, the business’s price, marketability, and deal structure will all be negatively impacted. Buyers perceive greater risk when a company’s success is tied too closely to the owner or a few key personnel, making the business inherently less valuable without them.

Take steps today to avoid being tied to your business post-sale.

Again, the value of intellectual capital is not just confined to KIFs, but to any business in which the owner or key personnel hold intangible knowledge and experience that are critical to the survival of the company. Examples would include:

• A contracting business if the owner has a team of installers/builders, but does all of the design and quoting themself.
• A machining company with a staff of five workers, but an owner who handles all sales calls and relationships.
• A design business with a team of graphic designers, but an owner who manages all of the client meetings, planning, billing, and final approval of projects.

This is not to say that there is no value in these companies, or that buyers do not exist for them. They do. These kinds of businesses sell every day, but the values and deal structures are not maximized for the owners.

Bluntly put, many sellers fail to achieve the price or deal structure they desire, largely because of factors within their control. These are often actions they could have taken during their ownership to reduce perceived risk, but didn’t. The more you, as an owner, proactively mitigate risks related to the transfer of your business, the more valuable and marketable your company will become.

We believe an additional reason for the persistent imbalance between owners’ expectations and the reality of a transaction is due to the way, culturally, that business owners are educated about valuation.

When consulted, a business appraiser will essentially take a snapshot of a business at a given point in time and deliver an indicated value. This value is in terms of a set dollar amount based on theoretical valuation models. This is certainly valuable information to a seller, but it does nothing to impart, in terminology that an owner can understand, how a real buyer is going to determine the value of their business. Unfortunately, as a result, owners often believe that they will be able to take their specific price expectation to market, and a buyer will come forward, cut them a check, and the rest is history.

That is not the case.

In fact, in most situations in which the owner is critical to the day-to-day functioning of the business, the owner may receive a down payment for the value of the business’s assets and be compelled to take the rest in a seller note, or an earnout based on future performance. Conversely, in situations where owners have well-documented business processes, employ a stable management team, and take steps to remove themselves from the necessity of their personal day-to-day oversight of the business, buyers often line up down the street ready to overpay and get the transaction wrapped up as soon as possible. We have documented examples here and here of how this played out in two successful business sales.

So, how exactly does owner dependence affect the sale process?

Let’s get specific by briefly examining each key metric of the sales process to better understand how and why the process can be negatively affected:

1. Price: Educated buyers will evaluate the potential effect of the absence of the owner or other key personnel. This will typically include an analysis of how future sales and relationships may or may not transfer. The buyer will then apply this risk to the valuation model, meaning that they will adjust future earnings or the earnings multiple applied downward, thus negatively affecting the price.
2. Marketability: If buyers are uncertain about a business’s quality, transferability, and synergies due to heavy owner involvement, it will take them longer to properly evaluate the company in terms of transition plan, fit, and valuation. Additionally, unlike in sales of owner-independent businesses, every buyer will view risk factors differently along a wider continuum. What may seem to be a negligible risk to one buyer will be an unmanageable risk to another; risk perception cannot always be predicted. These factors combined reduce the ability of an intermediary, such as Calder Capital, to run a tight limited-auction sales process. Fully evaluating the complexity of the business for sale inherently slows down the process and does not allow for the elements of the sale process to align in a fashion that maximizes price by leveraging multiple buyers against each other. Lastly, many high-quality buyers will simply look past the opportunity for one that does not present so many transferability questions.
3. Structure: The way that buyers compensate for risk is via deal structure. If a buyer is concerned about quality, transferability, and synergies, they will likely offer a lower price and/or terms that cause the seller to assume more risk. For example, if buyer and seller agree on a valuation of $3,000,000, instead of a one-time cash payout, the buyer may offer $2,300,000 cash at closing, a $400,000 seller note at 7% and an earnout of $300,000 based on future revenue. The buyer does so as a way to share risk in entering a situation where the outcome is far from assured and to ensure that the owner will do all they can to make the transition run seamlessly.

So, what are some things to consider in moving towards a sale process that will yield the highest price, best terms, and the least amount of time?

Actions owners can take today to improve their outcomes in a future sale:

In a research paper, Adil Gurbanov of the University of Twente presents a framework for understanding valuation gaps between owner-dependent and owner-independent businesses. In his study, he introduces a clear and practical model designed to help owners increase the value, marketability, and autonomy of their companies.

Drawing from our experience selling hundreds of businesses across a wide range of industries, ownership structures, and levels of owner dependence, we’ll examine each of Gurbanov’s concepts and share our insights on how they play out in practice.

Let’s explore the problems and the solutions together.

Problem #1:
The company’s client base is largely built on the owner’s personal network, with a high concentration of revenue coming from just a few key customers. This creates a perceived challenge for buyers, as these relationships are deeply tied to the owner’s direct involvement and long-standing history with clients.

Naturally, a buyer will ask, “Will these customers continue working with me?” If the owner cannot provide a reasonable level of assurance that they will, the deal structure often changes to include incentives, such as earnouts or consulting agreements, to motivate the owner to actively support the transition of those relationships after the sale.

Solution:
First, the business should focus on building a recognizable brand. This takes time and consistent marketing efforts within the company’s target region. A strong brand reduces reliance on the owner’s personal reputation and relationships to drive sales. While many owners take pride in not spending money on marketing, this often results in a lower sale price and a riskier transition when it comes time to sell.

Second, the owner should make a deliberate effort to diversify the customer base and reduce client concentration. Although managing one or two large, profitable relationships may seem easier, it poses significant risk from a buyer’s perspective. When a handful of customers represent most of the revenue, prospective buyers see warning signs, bright and clear.

Third, the owner should gradually transfer client management responsibilities to trusted staff. Over time, customers should view the owner as focused on strategy and growth rather than day-to-day operations. Introducing clients to project managers and reinforcing that the owner remains available if needed is a crucial step toward creating an owner-independent business.

Problem #2:
The business has a lack of delegation or ineffective or unstable management. Business owners will assert, “I must oversee everything to make sure there are no problems for customers. Yes, I’m exhausted and have no personal life, but at least everything is under my thumb.” This philosophy may work for an energetic sole proprietor during the company’s initial years, but it is not a recipe for business success, longevity, or continuity.

Solution:
The first step is finding competent employees and delegating to them. This can be extremely difficult and emotional for many owners, but it is absolutely critical. The E-Myth by Michael Gerber is a very helpful resource for owners to consult to understand how to take the steps necessary to grow a company beyond one person.

The second step is to institutionalize your knowledge into the business, via both its employees and documentation.

Problem #3:
The company lacks an effective manager who will remain with the company after its sale and who has the operational autonomy necessary to remain engaged and effective.

Solution:
Many leading management resources indicate that allowing employees’ autonomy within a set of standards and company goals is the best way to manage. A Cornell study of 320 small businesses divided their subjects into two groups: employees operating under traditional management, and employees allowed more autonomy and decision making. Over time, the companies with autonomous employees grew at four times the rate as those with traditional management and lost workers at one-third of the rate. It is crucial, of course, to hire or promote competent, trustworthy people, but utilizing a less controlling management style with them can be a very successful approach toward building and maintaining a business’s value. Conversely, micromanaging a competent staff reduces both retention and innovation.

Problem #4:
The owner runs his business in his or her head with no recorded business processes.

Solution:
Creating a manual, even just a narrative, of how a business works, is an enormous asset in a sales transition. Specifically address how sales are obtained, how work is outlined and conducted, how billing is handled, how employees are hired, reviewed, and fired. Any gaps in formalized processes should be stated and acknowledged. AI may be used to codify company knowledge or even act as a co-CEO.

Also, create and implement written policies and procedures. Often, larger companies will outline these policies and procedures on their websites, providing a quick resource so that small business owners need not spend months creating them from scratch. A lack of specific operational policies and procedures is a negative during the sales process.

Conclusion

These are just a few high-level challenges and potential solutions drawn from our experience in mergers and acquisitions. We recognize that transforming a business from owner-dependent to owner-independent is by no means an easy process. It requires commitment, a well-defined plan, and the willingness to entrust your name and legacy to others. Many owners struggle with the idea of stepping back and allowing others to run the business they built, and understandably so. Overcoming that psychological barrier is one of the toughest parts of the journey.

The goal of this article is to highlight that owner dependency, whether actual or perceived, can significantly reduce a company’s value, marketability, and deal structure appeal. However, taking deliberate, incremental steps toward owner independence can substantially reduce perceived risk in the eyes of buyers. The result is often a higher valuation, improved deal terms, and a smoother, faster path to closing.

About Calder Capital:

Founded in 2013, Calder Capital is a cross-industry mergers and acquisitions advisory firm with offices across the United States. Calder provides valuation, sell-side, and buy-side services. We are nationally recognized for excellence in advising $1-100M enterprise value transactions in manufacturing, construction, distribution, and business services. Calder serves business owners, entrepreneurs, family offices, financial buyers, and investors. Learn more at www.CalderGR.com.