The Founder factor: Understanding Key Man risk

In many owner-managed businesses, the founder is more than just a leader, they are the business. 

Their vision, relationships, and decision-making often sit at the heart of day-to-day operations and long-term strategy. While this hands-on approach can drive early success, it also creates a concentration of risk. This is known as “key man risk”, the potential vulnerability a business faces if that central figure steps away. 

One of the most common questions we hear during a sale process is, “What happens if you get hit by a bus tomorrow, how would the business function?” While we’ve thankfully never encountered that exact scenario, the question highlights a buyer’s concern. Can the business operate without the founder at the helm? 

This is a critical question, one that can influence not only the success of a transaction but also the overall valuation and deal structure. When buyers perceive heightened risk, particularly around leadership continuity, they tend to respond with lower valuations or safer deal structures designed to protect their investment.

So, what can you do to reduce this risk?

THE POWER OF A TEAM THAT CAN RUN WITHOUT YOU

Mitigating key man risk starts with shifting the business from founder-led to founder-supported. That means building a strong leadership team, delegating responsibilities, and ensuring the business can operate independently of any one individual. 

While some buyers may have the leadership in place to step in and run the business without the current owner, most won’t. In particular, private equity investors look for a strong, established management team they can back. Their focus is on investing in people as much as in performance.

Most buyers are familiar with the common line in marketing materials: “X has stepped back from day-to-day operations and now focuses solely on strategic matters.” While this sounds reassuring on paper, the sale process will quickly test whether it holds true. Buyers will dig beneath the surface to understand the founder’s real level of involvement, and any gaps between perception and reality can raise red flags.

A strong management team is the most effective way to validate and reinforce the claim that the founder has stepped back from day-to-day operations. Buyers will test this during diligence, not just by reviewing organisation charts, but by speaking directly with team members, assessing decision-making structures, and observing how the business runs without the founder’s direct input.

When a capable leadership team is clearly driving performance, it gives buyers confidence that the business is resilient, scalable, and not overly reliant on one individual. It turns a marketing line into a demonstrable reality, mitigating key man risk and strengthening both valuation and deal terms.

WHO COULD POSSIBLY REPLACE ME?

It’s a tough question, but one worth asking.

Succession planning can significantly strengthen your position when you go to market. Ideally, it’s something that’s been considered well before you consider an exit. 

Succession planning doesn’t need to feel like a Logan Roy power play. Done right, it is your chance to step back and ask: Who is best placed to lead this business forward? It’s an opportunity to identify the right person, whether internal or external, and ensure they’re equipped to carry your vision, and your people, into the next chapter.

Buyers don’t just want to see a name on an organisation chart. They want to know your team, your culture, and your clients are in capable hands. A well-considered succession plan signals stability, scalability, and strength beyond the founder. 

OKAY, BUT REALLY – WHO COULD REPLACE ME?

Let’s be honest, sometimes, you are indispensable. And that’s not necessarily a problem.

For the right buyer, this can be an opportunity. Rather than replacing you, they invest in you. Strategic buyers or private equity firms may offer equity participation, fresh capital, and operational support to unlock the next phase of growth, with you still at the helm. In this model, you transition from being the sole driver to a growth partner, backed by a team and resources that amplify your vision. 

Whilst this scenario may not deliver a full exit, it’s a chance to de-risk now while retaining equity, with the potential to drive further value through a second liquidity event down the line.

WHEN LIFE FORCES YOUR HAND

At Heligan, one of our most repeated phrases is “preparation, preparation, preparation”.

That said, as we’ve explored in previous articles on timing your exit, many business sales are triggered by life events. In these situations, there’s often limited time to plan. Does that mean you can’t sell your business? 

Not at all. But it does mean the buyer will likely perceive higher risk, which can influence both valuation and deal structure. Greater integration risk often leads to offers that include more buyer protections, such as deferred consideration, earn-outs, or conditional payments. 

If you’re facing a sale without time to prepare, all is not lost. But understanding how buyers respond to risk, and how to structure around it, can make all the difference.

For more on deal structures and how to protect value, see our article.