TLDR
- Owner dependency is how much of a business stops working when its owner stops: the work, the client relationships and the decisions.
- Buyers treat it as risk. The more a business needs its owner, the less they pay for the same profit, or the more of the price they hold back until after the owner has left.
- In one worked example, the same $250,000 of yearly owner profit priced at $450,000 when the owner was in daily, and $750,000 when the business ran two months without them.
- Turned into a date, that was 19 years to the owner’s FI number at one end and 14 at the other: five years, with no change in profit.
Every guide to owner dependency says it lowers your sale price. True. What they rarely do is turn that into the number an owner actually lives by: how many more years until the business, or what it sells for, pays your life without you.
What is owner dependency?
Owner dependency is the share of a business that only works while the owner is there. It shows up in three places: the work (you deliver the service), the relationships (clients and referrers are loyal to you, not the business) and the decisions (everything waits for your answer). A buyer is paying for what stays after you leave.
The two-week test
The simplest test: if you disappeared tomorrow with no phone, how long would the business run properly? Not survive. Run, with clients served, staff paid and nothing waiting on you.
- It doesn’t. You are the business. A buyer is buying a job.
- About two weeks. The work gets done, but decisions and key clients pile up waiting for you.
- About a month. Someone else can make most decisions; a few relationships are still yours.
- Two months or more. It runs without you. This is what buyers pay full price for.
How buyers price it
A buyer has two ways to protect themselves from a business that leans on its owner. They pay a lower multiple of profit, or they move part of the price into an earn-out that’s paid only if the business performs after you’ve gone. Either way, the risk moves back to you. Business advisers routinely list owner dependency among the things that raise or lower a small business’s value (SCORE has a plain guide to it).
The discounts below are the example settings in my calculator, not market rates. Your broker will have a view on your own business.
What it does to the date
One owner: the household spends $6,000 a month, so at a 4% withdrawal rate the FI number is $1.8 million. They have $400,000 invested. The business makes $250,000 a year for its owner, and similar businesses sell for about 3 times that.
| Runs properly without the owner for | Discount (example) | Price | What lands (70%) | Years to $1.8 million, nothing more saved | Years, saving $1,500 a month |
|---|---|---|---|---|---|
| It doesn’t, owner in daily | 40% | $450,000 | $315,000 | 19 | 15 |
| About two weeks | 25% | $562,500 | $393,750 | 17 | 13 |
| About a month | 10% | $675,000 | $472,500 | 15 | 12 |
| Two months or more | 0% | $750,000 | $525,000 | 14 | 11 |
Assumptions: sold today; 5% a year after inflation; counted in whole years with a year’s saving added at the end of each year. “What lands” is 70% of the price, the middle of the 60% to 80% many owners keep after earn-out risk, fees and tax.
To get the top row’s price up to the bottom row’s while staying in daily, the business would need to make about $167,000 more a year. Most owners can’t add two-thirds to their profit. Many can make themselves less necessary.
Dependency moves the date more than profit does, and it’s the part you control.
What reduces it
- The work: written procedures for the core service, and at least one other person who can deliver it to your standard.
- The relationships: clients introduced to the team, referrers who know the business by name, not just you.
- The decisions: spending limits, hiring and pricing calls that someone else can make without asking.
- The proof: a holiday where nothing broke. Buyers believe a track record more than an org chart.
I sold a business in 2014. It could run without me, and that’s most of why it was worth more than a solo practice. A business whose only asset is the founder is a job is the short version of why. The six levels of a service business is the long one, level by level.
What the dependency guides get right
Exit-readiness scores and dependency checklists are useful. They show you where the business leans on you, and a good adviser will help you fix it in the right order. The only thing they leave out is the date. Once you know your price at each level, you can see whether fixing dependency, keeping the business or selling it now gets you free soonest.
Run your own
Open the calculator, pick “I already own one” and set “How long it runs properly without you” to where you honestly are. Then move it one step. The calculator shows the new price and how many years sooner you’d be free.
Illustrative numbers, not advice. I’m not a licensed adviser. Valuation, tax and deal structure are questions for the people you pay to answer them.