Owner dependence: the discount on your price
If the business cannot run without you, a buyer is not purchasing an asset, they are applying for a job. Here is how buyers measure it and how to reduce it.
General information only, not financial, legal or taxation advice. Tony Pope holds Queensland Office of Fair Trading licence 4963575.
The short version
- Owner dependence is the single factor most likely to reduce a business sale price, and it is also the most fixable.
- Buyers test it by asking what happens when the owner takes four weeks off, and they check the answer during due diligence.
- The four areas that matter most are pricing and quoting, customer relationships, technical knowledge, and supplier relationships.
- Reducing it takes twelve to twenty four months, which is why the conversation is worth having well before you intend to sell.
Of everything that sets what a business sells for, owner dependence does the most damage and gets the least attention. Owners tend to see it as a compliment. Buyers see it as the risk they are being asked to buy.
What a buyer is actually asking
The question underneath every conversation is simple. If the owner leaves, what is left?
If you price every job, hold every significant relationship, carry the technical knowledge in your head and are the reason customers stay, then a buyer is not acquiring a business. They are buying a job that comes with your workload and none of your history. They price that accordingly, and their bank prices it harder.
The blunt test buyers use is this. What happens if the owner is unreachable for four weeks? If the honest answer is that things quietly fall apart, that shows up in the offer.
The four areas that matter
Pricing and quoting. If you are the only person who can price work correctly, the business cannot grow without you and cannot survive your exit. This is the most common one and often the easiest to fix, because pricing logic usually can be written down.
Customer relationships. If customers deal with you personally and would follow you rather than the business, the buyer is paying for goodwill that walks out the door. Introducing a second point of contact on major accounts changes this over time.
Technical knowledge. The fix is documentation and cross training. Unglamorous and genuinely valuable.
Supplier relationships. Favourable terms that exist because of your personal history with a supplier are not transferable. Where you can, get them in writing in the business name.
How buyers verify it
They ask your staff. They look at whether processes are documented or remembered. They check whether quotes go out when you are away. They look at your holidays over the last three years, and if you have not taken any, they draw the obvious conclusion.
This is not adversarial. It is the same question you would ask if you were buying.
What reducing it is worth
It moves two things at once. It lifts the multiple a buyer will apply, because the earnings look more durable. And it widens the pool of buyers, because a business that runs itself appeals to investors and to trade buyers, not only to someone who wants to work in it.
A wider pool is what creates competition, and competition is what actually sets price.
The timeline
Twelve to twenty four months is realistic. Document the pricing logic. Introduce a second contact on your top accounts. Write down the things only you know. Take a proper holiday and see what breaks, because what breaks is your list.
This is the clearest argument for having an appraisal conversation early. Knowing your number is useful. Knowing which two or three things would move it, with enough time to actually move them, is worth considerably more.
Common questions
What is owner dependence in a business sale?
The extent to which the business relies on you personally to operate. If you price every job, hold every key customer relationship, make every decision and are the only person who can do the difficult work, then most of the business walks out the door when you do. It is the single heaviest factor on the multiple a buyer will pay.
How do I reduce owner dependence before selling?
Bring in or promote a second in command with real authority, document the processes that only exist in your head starting with quoting, move key customer relationships to other people in the business, and then take a genuine break to test whether it holds. This takes twelve to twenty four months, which is why the conversation is worth having early.
Does owner dependence stop a business from selling?
Not usually, but it narrows the buyer pool and lowers the price. A highly owner dependent business appeals mainly to a buyer prepared to step into the role themselves, which rules out trade acquirers and investors, and those are frequently the buyers who pay the most.
Keep reading
All notes on selling a business · All seller guides · What is my business worth?
Check it yourself
Primary sources, none of them affiliated with me and none of them endorsing this site. Where anything here differs from an official source, the official source is right.
Links open on external government and industry websites. The full list sits on licensing, registers and official sources.
Ask what it is worth
Free, in writing, and nobody finds out you asked. Tell me the trade and the suburb and I will do the rest.
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If you would rather not put anything in writing yet, ring 0431 124 128. Prefer to pick a time yourself? Book a time in my diary.
Thinking about selling?
Thirty minutes, on the phone or in person, at a time that suits you including evenings. You will get a straight read on where the business sits today and what would move the number. It costs nothing, there is no obligation, and nobody finds out you asked.