Service Company - Managing Key Man Risk

October 27, 2025

by a searcher from University of Pennsylvania - The Wharton School in West Chester, PA, USA

Hello all, I'm currently doing due diligence on a service company. My chief concern is key man risk. The work is being done by four techs, two of whom are owners and will need to be replaced within 2 years. One of the two, non-owner techs is a senior guy that the business needs to retain in order to be successful post-acquisition. Does anyone have experience with deal structures / incentives to derisk a situation like this? The chief tech has interest in becoming an owner, but the current owners don't think he as the business savvy to acquire alone.

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Reply by a professional
from Lindenwood University in St. Louis, MO, USA

Hi there! While structuring the deal to mitigate key-man risk is one lever, I’d encourage you to also treat this as a succession and continuity planning issue. Since the owners plan to exit within ~2 years, that window should be used intentionally to: 1. Recruit and onboard replacements early: Ideally overlapping for 6–12 months to preserve institutional knowledge and client trust. 2. Retain critical non-owner staff: Consider retention bonuses and profit-share tied to tenure and performance milestones. 3. Tie seller payouts to successful transition outcomes: For example, staged payouts based on completion of recruiting, onboarding, and turnover-free client delivery during the transition period. This dual approach (deal structure + operational succession) not only reduces key-man risk but also increases post-close stability and valuation resilience. At the end of the day, you rarely will go wrong when you up the anty with performance incentives that directly empower the longevity and health of the business. Hope this helps! All the best on your future transaction.

Reply by a searcher
from Bates College in Washington, DC, USA

I would focus on the fact that the chief tech wants to be an owner, but the current owners are selling to you instead. That could lead to a lot of friction after you acquire the business. With this individual being one of only two techs expected to remain with the business long term, that's a lot of risk for you to assume. Also, if the current owners have ever discussed ownership with the chief tech, this tech may expect to own the business or feel that it was promised to them. I would ask the current owners a lot about their discussions with this tech and proceed carefully.

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