Does my business being dependent on me lower the price?
No published study puts a number on it. What is measured is that CEOs move operating performance, and that dependence narrows the buyer pool, which is the more concrete cost.
Almost certainly yes, and nobody has published an estimate of by how much. Key person discounts of ten to twenty-five percent circulate widely; we could not find an empirical study behind any of them.
What is measured is more useful anyway.
The evidence that owners matter
A 2020 study in the Journal of Finance used CEO hospitalisations as a natural experiment, which removes the usual problem that good businesses attract good leaders. The sample is unusually well matched to this question: roughly 13,000 Danish small and medium-sized businesses, observed from 1996 to 2012.
Absences of ten days or more were associated with a decline of about one percentage point in operating return on assets. The effect was larger in growing and family-controlled firms and in human-capital-intensive industries. And it was specific: in the authors' words, "CEOs are unique: the hospitalization of other senior executives does not have similar effects."
Their conclusion was not a discount. It was that "CEO contingency plans are valuable."
The cost that is concrete
Not the multiple, the buyer pool. Funds and most strategic buyers will not acquire a business that stops working when one person leaves, which removes them from the process before any number is discussed. What remains is individual buyers, who are usually buying a job as well as a business, and who bring less capital and less financing with them.
Fewer bidders is a more reliable way to lose money than any discount rate adjustment, and unlike the discount it does not require anyone to publish a figure for it to be true.
The test buyers apply
Not a question they ask directly. They work it out from three things: who owns the top customer relationships, who makes the pricing decisions, and what happened the last time you were away for more than a fortnight.
- Name the owner of each of your top ten customer relationships
- List the three decisions only you currently make
- Take two consecutive weeks off and write down what breaks
- Check whether your processes exist anywhere other than your head
The two weeks off is the honest version of the test, and it produces something a buyer can verify. Their concern is unfalsifiable while you are in the building every day. An owner who can point at a fortnight where nothing broke has converted an argument into a fact.
Why it goes first in any preparation plan
Because it is the slowest to change. Margin can be improved in a year and contracts can be signed in a quarter. Transferring ten customer relationships and documenting how the business actually works takes longer than owners expect, and it cannot be done convincingly at speed.
It is also the one significant valuation factor that is almost entirely within your control. That is a better reason to act on it than any published percentage would be.
Owner dependence: strong logic, no price data goes through the research in full. Preparing your business for sale has the twelve-month sequence.
Sources
- Bennedsen, Pérez-González and Wolfenzon, "Do CEOs Matter? Evidence from Hospitalization Events," Journal of Finance 75(4), 2020, pp. 1877–1911. https://econpapers.repec.org/RePEc:bla:jfinan:v:75:y:2020:i:4:p:1877-1911
- INSEAD summary of the same research, for the sample of approximately 13,000 Danish businesses and the size of the operating return decline. https://www.insead.edu/news/insead-research-finds-how-much-ceos-matter-firm-performance