Your Best Asset Puts On a Coat and Goes Home at Five
A manufacturer's value sits in the building. You can walk the floor, count the machines, kick the inventory. A services firm's value puts on a coat every evening and goes home, and some fraction of it is having dinner with a recruiter who called last week. That's the strange thing about the business you've built. It runs on almost no capital, which feels like an advantage right up until the day you try to sell it.
Owners love the low capital intensity. No heavy equipment, no warehouse, no line of credit against a pile of steel. You've kept the money light and the margins clean, and for years that's the right way to run it. Then a buyer comes to the table and asks the question that reframes the whole thing. If the assets go home at five and can quit on 2 weeks' notice, what exactly am I buying?
The discount has a name and a number
Valuation professionals call it the key person discount, and it is not a soft, hand-waving thing. It's a specific markdown applied when a business depends too heavily on one individual, and the ranges they publish are sobering. Common cases run 5 to 25 percent off the value. Severe ones, where the owner holds the client relationships and works 50 hours a week doing the actual work, can run 20 to 50 percent.
Put it in multiples, which is how a buyer will actually think. Advisors who track lower middle market deals describe owner-dependent firms selling at roughly a full turn to 2 turns of EBITDA below their management-run peers in the same sector. Take a firm doing $2 million of EBITDA in a market that trades at 5 times. On paper that's a $10 million business. Let a buyer see that the seller owns the top relationships and personally runs delivery, and the same firm often clears at 3.5 to 4 times. That's $3 million of value, gone, and it was never on the balance sheet to begin with. It was sitting in your calendar.
You are the bottleneck, and buyers can see it in a week
The reason the discount lands so hard on services firms is that the owner is usually the sales force, the pricing authority, and the senior delivery all at once. The best clients signed because of you. The rates hold because you defend them. The hard engagements get staffed with you. It's an efficient way to run a firm of 30 people and a terrible thing to have a buyer discover.
A buyer discovers it fast. They ask who owns the top 10 relationships, and your name comes up 10 times. They ask who sets pricing, and it's you. They ask what happens to the 2 largest clients if you leave, and the room gets quiet. Every one of those answers is a reason to lower the offer or load the deal with an earnout that keeps you chained to the desk for 3 more years, working for a number you already thought you'd sold.
None of this is about how good the firm is. A wonderful, profitable, growing firm that cannot function without its founder is worth less than a merely good one that can. Buyers aren't paying for how it performs while you're there. They're pricing what's left the day you aren't.
The fix takes longer than the sale process does
This is the part owners don't want to hear. You cannot fix owner dependence in the 90 days before you go to market. The people who do this for a living put the runway at 18 to 36 months, because you're not editing a document, you're transferring relationships and authority that took 20 years to concentrate in one person.
The work is unglamorous and specific. Move client relationships to named people below you, deliberately, one account at a time, until the client calls the manager first and you second. Give someone other than you the authority to set and hold a price, and let them make a mistake or two learning it. Build a delivery layer that handles the hard engagements without your hands on them. Each of those is a transfer, and every transfer you complete is a piece of value that stops walking out the door at five and starts staying with the firm.
Start it now, whether you plan to sell in 3 years or 10. Ask yourself the buyer's question first. If you stepped out for 90 days, which clients would wobble and which decisions would stall until you got back? That list is your discount, itemized. Work it down one name at a time, and you are not just preparing for an exit. You are building the only kind of services firm that's worth a premium, the kind that keeps running after the owner puts on his coat.