What a buyer is actually pricing when they look at your firm

A principal thinking about selling tends to focus on revenue, margin, and client retention, which is reasonable, because those are the numbers everybody discusses. They are also the numbers a buyer can verify in an afternoon.

The part that takes longer, and moves the price more than most owners expect, is the question underneath: how much of this business is the person selling it?

What a buyer is really asking

A buyer is not purchasing last year. They are purchasing the years after the owner stops answering the phone. Every question in diligence is a version of the same one, which is what happens to this revenue when the person who built it is no longer here.

So they look for dependency. Who holds the largest client relationships. Who decides how an exception gets handled. Who knows why the firm does something the unusual way it does it. Where the answer is consistently one person, the buyer is pricing the risk that the answer walks out at closing.

Undocumented process is dependency you cannot see in the numbers

Key person risk is usually discussed as a relationship problem, and the relationship half is well understood. The operational half is quieter and just as real.

If nobody has written down how onboarding runs, how a distribution gets approved, or what happens when a custodian rejects a form, then that knowledge is held by whoever has been doing it. It does not appear in the financials. It appears the first week after they leave, and a buyer who has integrated firms before knows exactly what that week looks like.

The test is not whether the firm runs well. It is whether it would keep running well if it changed hands on a Monday.

What diligence can actually read

A buyer cannot audit institutional memory. They can only read what exists. Which means the material that changes their assessment is the material that is written down:

• Documented procedures for the processes that repeat, kept current rather than written once
• A clear record of which system owns which data, and how information moves between them
• Training material that a new hire actually learns the job from
• A log of what changed in the operation, when, and who changed it

None of that is written for a buyer. It is written because it makes the firm cheaper to run and easier to staff. It happens to also be the only evidence a buyer has that the business is transferable, which is why firms that did the work for operational reasons tend to find diligence a much shorter conversation.

If you are three years out

Three years is enough time for this to be a normal operating project rather than a pre-sale scramble. It is also long enough that the systems will have been used, corrected, and used again by the time anybody looks at them, which is what makes them credible.

If you are twelve months out, it is still worth doing, and the honest framing is different. At that point you are not changing how the firm runs so much as making legible what it already does, and a buyer can usually tell which one they are looking at.

We are not valuation advisers, and what your firm is worth is a question for your banker. What we can say is that the thing buyers discount for is dependency, and dependency is an operational condition with an operational fix.