The Seller Who Leaves: Pricing Key-Person Dependency in UK Acquisitions

Every founder-led sale contains the same tension. The seller's case rests on the proposition that the business is institutional — that customers buy the company, not the individual. The buyer's instinct, usually correct, is that a meaningful share of the revenue is attached to one person's mobile telephone. The gap between those two positions is not a matter of sentiment. It is a matter of price, and it can be closed with evidence.

Evidencing dependency rather than asserting it

Diligence on key-person risk often consists of an interview, a reassurance and a warranty. That is not evidence. What a buyer should actually request is a set of artefacts that test the proposition from several directions at once.

Start with revenue attribution. Request the top twenty customers by gross profit, together with the identity of the relationship owner for each, the date of last direct contact recorded in the CRM, and the signatory on the most recent contract or renewal. Where the founder signs, renews and services the largest accounts, the concentration is not customer concentration in the ordinary sense — it is personal concentration, and it deserves a separate adjustment.

Then read the contracts themselves, not the summary schedule. Assignment and change-of-control provisions determine whether revenue survives completion at all; a customer entitled to terminate on a change of control is a different risk from one whose relationship merely needs managing. Look for named-individual clauses in professional services agreements, personal guarantees given by the founder, and supplier or licensing arrangements granted by reference to the founder's own credentials. A licence, regulatory registration or accreditation held in an individual's name rather than the company's is a defect that should have been fixed years before a sale process began.

Finally, examine the second line. Who signs off technical work when the founder is unavailable? Which employees have direct customer contact and their own relationships? Employee tenure, retention history and any equity or option participation are all proxies for whether the knowledge sits in the business or in one head.

Turning the finding into a number

A defensible adjustment requires three inputs: the gross profit attached to relationships the founder personally owns, an estimate of attrition probability if the founder departs within twelve months, and the time and cost of replacing that revenue. The output is rarely a precise figure, but it is a defensible range, and a range is what a price negotiation needs. It also disciplines the conversation: a seller who disputes the assumption can supply the data that disproves it.

Deferred consideration that actually retains

Deferred consideration payable whether or not the seller remains is not retention; it is vendor financing with a retention narrative attached. The structure should separate three things that are often bundled together.

• Enterprise value consideration, paid for the business as it stands.
• A service-linked tranche, released only against continued service, with defined triggers for departure — good leaver, bad leaver, death and incapacity treated separately.
• A performance-linked earn-out, measured on a metric the seller can influence but not manipulate.

On the earn-out, the drafting points decide whether it works. Gross margin is harder to distort than revenue. Accounting policies should be fixed at completion, with a covenant that the buyer will operate the business consistently and not deliberately frustrate the earn-out. Access to management accounts, a right to information and an expert-determination route for disputes are all standard, and all routinely omitted.

Escrow and set-off arrangements matter more where the dependency is severe. A portion of consideration held against specified losses — customer attrition above an agreed threshold, for example — converts a soft concern into a recoverable sum without requiring the buyer to litigate a warranty claim.

Warranty and indemnity insurance does not solve this. Key-person dependency is typically excluded or heavily qualified, and an insurer will not underwrite a risk the buyer has identified and chosen to price. A specific indemnity, negotiated openly, is usually the more honest instrument.

What restrictive covenants can and cannot do

Covenants bind the seller. They do not bind the team, the customers or the suppliers, and buyers sometimes draft as though they do.

The enforceability test in England remains one of reasonableness: scope of restricted activity, geography and duration must protect a legitimate proprietary interest and go no further than necessary. Twelve to twenty-four months is common for non-compete covenants in trade sales, with non-solicitation of customers and employees often running longer. Consideration matters — covenants granted in a share purchase agreement are supported by the purchase price, but where they are given under a separate consultancy or transition agreement, the tax treatment can differ and warrants advice before signature. Enforcement is by injunction, which means speed, cost and a court's willingness to assess the evidence within weeks.

Practical value therefore lies less in the twelve-month non-compete than in the preceding twelve months of handover. A covenant is a remedy for breach; a handover is a mitigation.

Handover periods and the successor problem

A well-drafted handover is a schedule of deliverables, not a promise of goodwill. Typical provisions run six to twelve months and should specify introductions to the top accounts, joint attendance at key meetings, documentation of undocumented know-how, training for a named successor, and the transfer of supplier and regulator relationships that rest on personal familiarity.

Tie release of the service-linked tranche to those milestones rather than to the calendar. Where the founder is genuinely irreplaceable in the short term, a phased consultancy arrangement — full-time for three months, two days a week thereafter — is usually more effective than a cliff-edged service agreement that both parties resent by month four.

Drafting points for the file

Define the key person by name, not by role. Identify material customers and material contracts by value and specify what happens to consideration if either is lost. Provide a specific indemnity for undisclosed personal arrangements. Ensure the disclosure letter addresses the founder's relationships candidly, because a buyer who has been told the truth cannot later claim to have been misled — and a seller who has told it will find the price discussion considerably shorter.

The cultural concern is real, but it is not a category of risk a board can act on. Converted into attrition assumptions, tranche structures and covenant terms, it becomes what it always was: a question of price.