Key-person discount

Definition

The cut an appraiser takes off value when one person carries the business.

Why It Matters

It is the arithmetic that key-person risk turns into. An appraiser who finds the owner holding the license, the relationships, or the estimating judgment does not just write a warning. The dependence comes off the value, because a buyer is purchasing earnings that survive the handover. That makes it the one valuation adjustment a seller can shrink by working rather than by arguing. Document the processes. Put a second name on the license where the state allows it. Introduce the top accounts to somebody who is staying. Promote the manager before the sale, not during it. Each of those moves earnings out of the owner's head, and the discount narrows as they land. Key-person insurance pays out if the person dies and does nothing about the price. The discount for lack of marketability asks how hard the business is to sell at all, not who runs it.

In numbers: On $1.5M of SDE a 3.2x multiple is $4.8M, and a 15% key-person discount for an owner who holds the top accounts prices it at $4.08M.