Key Man or One Man Operation Risk

August 26, 2024

by a searcher from Boston University in Salt Lake City, UT, USA

Has anyone run across businesses run by one person? Has anyone closed on deals like this? I know there are clear key man risks and I wanted to reach out to the community to get some better insight into how this has been done. For context, I am looking at a business where there is an owner and a secretary. Work is subcontracted out to individuals and companies who the owner has long term relationships with (another risk) and he acts as project coordinator and quality expert. The owner is open to staying on for a year to teach the business operations/make intros and act as a consultant afterwards. The appeal of the business is that its old school with no website, no marketing, a great reputation and portfolio and is limited by its one man owner. I believe with a small and lean team the business could grow significantly but I am also wary of the one man risks. Any thoughts, experience or ideas about how to structure a potential deal would be welcome!

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

We have definitely financed numerous businesses over the year where there is only one "Key Man" or employee, which is the owner, and all service work is out-sourced in one way or another. The trick here is understanding how essential that owner is to the business and the relationships the business has. If all of those relationships are long-term relationships where he is super involved, there is a risk they could leave if he is no longer there. You want to be sure to understand what the competition looks like and how essential this business is to its customers. With that said, there are plenty of good businesses that need someone to step in and take over and the customers will stick around for the service. You just have to try and figure out if this is one of those. If you have additional questions or need assistance analyzing the business you can reach me here or directly at redacted Good luck!

Reply by a searcher
from University of Wisconsin in Los Angeles, CA, USA

This is a very risky business because the owner appears to run the vast majority of the business and the business runs off the owners relationships. Would he be open to hiring you and letting you work under him for a year so you can learn more about the business, your ability to run it, and start to build the relationships? I think the most important pieces of diligence are: 1) What does the seller want to do after selling the business? Is he old and want to retire (less risk) otherwise I would be concerned he could be a competitor in the future; 2) Make sure that this is a business that you are capable of running on your own; and 3) building a good relationship with the owner and negotiating a long transition period (at least 1 year) and long earn-out is absolutely critical.

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