Who actually runs the business you're buying?

This week, we’re focusing on what I call the “silent killer” of acquisitions.

Most buyers don’t spend nearly enough time looking for this during due diligence (assuming they even know what to look for).

And if you don’t catch this early, it can tank your newly-acquired business literally overnight.

I’m talking about: Employee dependency.

What is employee dependency?

This is where the business relies upon one or two essential employees outside of the owner.

I’ve talked about key man risk in other content, usually in the context of an owner who’s still working 24/7 holding the business together through duct tape and sheer will.

Employee dependency is another example of key man risk, and just as dangerous.

Why is this dangerous?

If you walk into this situation blindly, you’ll be at the mercy of these essential employees.

It could be:

• A lead technician who’s the only one licensed to do specialized work

• A salesperson who handles all the big accounts, knows which clients need hand-holding, and effortlessly smooths over complaints from longtime customers

• A bookkeeper who understands the owner’s Frankenstein accounting system built on outdated software

Or all of the above.

These people will have all the leverage they need to demand whatever they want of you. Or else, they walk.

So at first glance, employee dependency is already pretty bad.

But it’s even more dangerous than it looks.

Other risks include:

• Essential knowledge is concentrated in a single person. If they leave, no one else will know how to do critical tasks

• These employees can turn the team against you if they’re unhappy with the transition

• Some employees might be a flight risk. Meaning, they might be about to make a big life change like having kids or moving cities

• Clients are loyal to these employees personally, not your company, and may follow them out the door

And the biggest risk isn’t just that your key employees might leave... but that they’ll leave to start their own business, take your customers with them, and start competing against you!

What can you do about it?

It’s not always a deal breaker if a business has employee dependency.

But, sellers will rarely tell you that this is the case.

So you need to:

• Uncover any and all potential employee dependency risks

• Assess whether it’s worth it to you

• Protect yourself legally and logistically before committing to the deal

I’ll explain how to do all of this in Thursday’s issue.

Until then, here’s something you might find useful:

I occasionally come across high-quality small business deals and investment opportunities, and pass them along to this list.

If you want to get those emails, just fill out the 2-minute survey below.

👉 I want to buy (or passively invest into) a small business

Or, if you own a small business and you’re looking to sell, tell me more about it below:

👉 I want to sell my small business (and I’m actively looking for buyers)

Onward,

— Ben Kelly