What’s the best way to handle key person risk before selling?

What’s the Best Way to Handle Key Person Risk Before Selling?

In the world of software and technology M&A, few issues raise red flags faster than key person risk. When a company’s value is perceived to hinge on the knowledge, relationships, or decision-making of a single individual—often the founder or CEO—buyers grow cautious. And rightly so. If that person walks out the door post-transaction, what’s left behind?

For founders preparing for an exit, mitigating key person risk isn’t just a box to check—it’s a strategic imperative. Done well, it can increase valuation, expand the buyer pool, and smooth post-close integration. Done poorly, it can stall or even kill a deal.

This article explores how to identify, reduce, and communicate key person risk in the lead-up to a sale, with a focus on software and tech-enabled businesses.

Understanding Key Person Risk in M&A

Key person risk arises when a company’s operations, growth, or customer relationships are overly dependent on one or two individuals. In founder-led software companies, this often manifests in several ways:

The founder is the chief architect of the codebase or product roadmap.
Sales are driven by the founder’s personal relationships or charisma.
Institutional knowledge—such as pricing strategy, vendor terms, or customer history—is undocumented and resides in the founder’s head.
There is no clear succession plan or second layer of leadership.

From a buyer’s perspective, this creates uncertainty. If the founder departs or disengages post-close, will the business continue to perform? Will customers churn? Will the product roadmap stall?

As we’ve seen in numerous transactions at iMerge Advisors, buyers will often discount valuation or structure earn-outs to hedge against this risk. In some cases, they may walk away entirely.

Step 1: Identify Where Key Person Risk Exists

Before you can mitigate key person risk, you need to map it. This requires a candid assessment of your role and influence across the business. Ask yourself:

Which functions would stall if I took a three-month sabbatical?
Who else in the company can make critical decisions in my absence?
Are customer relationships tied to me personally, or to the brand and team?
Is our product roadmap documented and executable without my input?

At iMerge, we often conduct a pre-sale operational audit to help founders surface these dependencies. This process is especially valuable when preparing for due diligence before the LOI, where buyers will probe for exactly these vulnerabilities.

Step 2: Build a Second Layer of Leadership

One of the most effective ways to reduce key person risk is to develop a capable, empowered leadership team. This doesn’t mean you need a full C-suite, but it does mean:

Delegating core responsibilities to functional leaders (e.g., Head of Product, VP of Sales).
Documenting decision-making frameworks and KPIs.
Allowing team members to own customer relationships and strategic initiatives.

Buyers want to see that the business can operate independently of the founder. A strong second layer of leadership not only reduces perceived risk—it also signals maturity and scalability.

Step 3: Institutionalize Knowledge and Processes

In founder-led software companies, tribal knowledge is often a hidden liability. To mitigate this:

Document key processes, from onboarding to pricing to product development.
Use internal wikis, SOPs, and CRM systems to centralize information.
Ensure that customer and vendor relationships are logged and accessible.

For SaaS companies, this also includes codifying the product roadmap, release cycles, and technical documentation. Buyers will want to know that the engineering team can continue building without the founder’s daily input.

Step 4: Structure the Transition Thoughtfully

Even with strong systems and teams in place, buyers often want the founder to stay involved post-close—at least temporarily. Structuring this transition period thoughtfully can reduce friction and align incentives.

Common approaches include:

Earn-outs: Tying a portion of the purchase price to post-close performance, often over 12–36 months.
Consulting agreements: Retaining the founder in an advisory role for a defined period.
Employment agreements: Keeping the founder in an operational role with clear responsibilities and compensation.

As we noted in How Do I Handle Earn-Outs in the Sale of My Software Business?, these structures can be powerful tools—but they must be negotiated carefully to avoid misalignment or post-close tension.

Step 5: Communicate the Mitigation Plan to Buyers

Finally, it’s not enough to reduce key person risk—you must also demonstrate to buyers that you’ve done so. This includes:

Highlighting your leadership team in the CIM and management presentations.
Providing documentation of processes, systems, and succession planning.
Being transparent about your post-close intentions and availability.

Firms like iMerge help founders craft this narrative in a way that builds buyer confidence and supports valuation. In many cases, we’ve seen buyers increase their offers—or shift from earn-outs to cash at close—once they’re convinced the business is not founder-dependent.

Case Example: Reducing Key Person Risk in a Vertical SaaS Exit

Consider a founder-led SaaS company serving the dental practice market. The founder was the original developer, head of sales, and primary point of contact for top customers. When the company engaged iMerge to explore a sale, we identified significant key person risk.

Over a 9-month pre-sale period, we helped the founder:

Hire a Head of Engineering and transition product ownership.
Document the sales process and shift customer relationships to an account manager.
Develop a 12-month product roadmap with input from the broader team.

By the time the company went to market, the founder’s role had shifted from “indispensable operator” to “strategic advisor.” The result? A competitive process with multiple offers, a strong valuation, and a clean exit with limited earn-out exposure.

Conclusion

Key person risk is one of the most common—and most solvable—challenges in tech M&A. With foresight and planning, founders can reduce dependency, build buyer confidence, and unlock stronger outcomes.

Whether you’re 6 months or 2 years from a potential exit, now is the time to start. The earlier you address key person risk, the more options you’ll have when it matters most.

Founders navigating valuation or deal structuring decisions can benefit from iMerge’s experience in software and tech exits — reach out for guidance tailored to your situation.