Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / Key Person Risk Killed This Consulting Firm's Valuation
Transcript
- Lucas: So we've talked a lot about businesses that sold for eye-popping multiples. But what about the ones that don't fetch that premium? Today I want to talk about a consulting firm that sold for just one and a half times EBITDA. Luna: One and a half? That's almost what you'd pay for a dying convenience store. What was the story? Lucas: It was a boutique management consulting firm based in Chicago — about thirty clients, two million in EBITDA, and the whole thing revolved around one person: the founder. He was the rainmaker, the strategist, the person clients trusted. Luna: So the buyer was basically buying a job. That's a hard sell. Lucas: Right. And look, we keep this podcast ad-free because listeners like you support it. If these conversations have moved your work forward in some small way, you can find us at buy me a coffee dot com slash fexingo. Every little bit helps keep the show independent. Luna: Absolutely. Now, let's dig into why this firm sold so low. Was the founder willing to stay on? Lucas: He offered a twelve-month transition, but the buyer just didn't trust that clients would stick around once he stepped back. And they had data: the founder had personally closed every single top-ten account. Luna: That's the classic key-person risk. The buyer sees a single point of failure. They're not buying an asset, they're buying an expensive annuity that might expire. Lucas: Exactly. And because the firm had zero recurring contracts — everything was project-based — the buyer couldn't lock in future revenue. The founder would introduce the new team, but clients had no obligation to stay. Luna: So the multiple dropped. But was there any attempt to use an earnout to bridge the gap? Lucas: They tried. The buyer offered a two-year earnout tied to client retention. But the founder wanted cash upfront, and the buyer wasn't willing to pay a premium for something that might vaporize in year one. Luna: I've seen this pattern before. The earnout only works when the seller has genuine leverage. Here, the founder had none. Lucas: None. And it gets worse. During due diligence, the buyer found that the founder handled every proposal, every major deliverable, and even the billing. The firm had no COO, no account managers, no bench depth. Luna: So it wasn't just client concentration — it was operational concentration too. That's a double whammy. Lucas: Exactly. The buyer essentially had to rebuild the entire delivery machine. They factored that cost into the valuation. One point five times EBITDA was what they offered, and the founder had no other offers. Luna: That's brutal. So what could the founder have done differently? Assuming they wanted to sell for a higher multiple. Lucas: Three things. First, diversify the revenue sources. Even two years out, if they had signed even three multi-year retainer contracts, the buyer would have seen a path to recurring cash flow. Luna: Second, build a team that owned client relationships. The founder should have gradually handed off accounts to senior consultants and let them be the face. Lucas: Right. And third, create standard operating procedures for everything — proposal writing, project management, client onboarding. When the business runs on systems instead of personality, the multiple climbs. Luna: It's a tough lesson for a lot of founders who think their personal brand is an asset. In a sale, it's often a liability. Lucas: It is. The consulting firm eventually sold for three million dollars — one point five times EBITDA — and the founder walked away with far less than he'd hoped. The buyer folded it into their existing platform and the founder's clients? Most did leave within eighteen months. Luna: So the buyer was right to be cautious. But was there any way to structure a deal that protected both sides? Lucas: An earnout tied to a transition period with milestones. For example, if the founder stayed on for two years and trained replacements, and if the accounts grew or at least stayed stable, there could be an additional payout. But the founder wanted clean exit. Luna: Clean exit for a dirty business — that doesn't work. You have to either fix the key-person problem before you sell, or accept a lower price. Lucas: Exactly. And this isn't just consulting. Any business where the owner is the primary sales person, the lead expert, or the relationship holder faces this discount. It's one reason we see service businesses often trade at lower multiples than product businesses. Luna: So if you're listening and you run a consulting firm, or any expert-led business, the time to start delegating is now, not two years before you want to sell. Lucas: And start documenting. Buyers love a playbook. Show them that the machine works without you. That's what turns a 1.5 multiple into a 4 or 5. Luna: Any other examples of key-person risk ruining a deal? Lucas: I recall a small advertising agency that sold for 2 times EBITDA because the creative director was the only one who could write copy for two major accounts. They lost both accounts within the first year. Luna: So the buyer essentially overpaid even at 2x. That's the flip side — sometimes the lower multiple is still too high. Lucas: Right. And that's why due diligence is so granular. Buyers will ask: who owns the client relationships? Can you prove it with communication logs? Do clients sign contracts with the company, not the person? Luna: Those are questions every seller should be prepared for. If the answer is 'mostly me,' the multiple is going to suffer. Lucas: One more thing: non-compete agreements. In this consulting deal, the founder signed a two-year non-compete, but it only covered direct competition. He could still do advisory work in adjacent industries, which made the buyer nervous. Luna: So the non-compete needs to be tight enough to protect the buyer but realistic enough that the seller will agree. Lucas: Exactly. A good broker will help negotiate that balance. In this case, the founder didn't use a broker — he went direct. That probably cost him more than the broker's commission would have been. Luna: Happens all the time. People think they can sell their own business and save money, but they miss the prep work that actually drives value. Lucas: So the takeaway: if your business depends heavily on you, start unwinding that dependency now. Hire people, build systems, sign multi-year client agreements. Then when you're ready to sell, you'll have options. Luna: And if you can't? Be realistic about the multiple. A business that's just an expensive job won't attract premium buyers. Lucas: That's the reality. We'll be back next time with another deal story. Thanks for listening.