What Is Key Person Risk? | Agency M&A Definition
Key person risk is the threat that a business will lose significant value if one or a few critical individuals leave, become incapacitated, or disengage. In the context of agency M&A, it describes the danger that a founder, lead creative, or rainmaker relationship manager is so central to the agency’s operations that the business cannot sustain itself without them.
Key Person Risk in Agency M&A
Key person risk is the single most common value-destroyer in marketing agency transactions. Many agencies are built around a charismatic founder who personally manages the top clients, leads new business pitches, and sets creative direction. When that founder sells and eventually exits, clients may follow them out the door. Buyers have seen this play out repeatedly — a founder-led agency sells for a strong multiple, the founder departs after a 12-month transition, and 30-40% of revenue evaporates within the following year. To mitigate this, buyers structure deals with extended transition periods (often 18-24 months), earnouts tied to revenue retention, and non-compete agreements preventing the seller from poaching clients or staff. Smart sellers begin reducing key person risk years before a sale by delegating client relationships to senior account managers, building a leadership team that can operate independently, and ensuring the agency’s brand — not the founder’s personal brand — is what attracts clients. An agency where the founder touches every client is a fundamentally different asset than one where the founder has stepped into a strategic role while the team runs day-to-day operations.
How Key Person Risk Affects Agency Valuation
Key person risk can reduce an agency’s valuation multiple by 1-2x EBITDA, representing hundreds of thousands of dollars in lost deal value. A digital agency with $600,000 in EBITDA might command 6x ($3.6 million) with a strong management team but only 4.5x ($2.7 million) if the founder is the linchpin — a $900,000 difference. Buyers quantify this risk by analyzing what percentage of revenue the key person directly manages, whether client contracts are with the agency or informally with the individual, and how the agency has performed during the founder’s absences. Even when the headline multiple is maintained, key person risk shifts value from cash at closing into contingent payments like earnouts. A buyer might offer $3.6 million but structure it as $2.2 million at close and $1.4 million in earnouts, effectively making the seller prove the business can survive the transition.
Example
A social media marketing agency generates $3.2 million in revenue and $640,000 in adjusted EBITDA. The founder personally manages the top five clients, which account for 60% of revenue. During due diligence, the buyer identifies severe key person risk and adjusts the offer from 6x EBITDA ($3.84 million) to 5x ($3.2 million), with only $1.92 million at closing and $1.28 million tied to a two-year earnout contingent on retaining 85% of revenue. Had the founder spent two years before the sale transitioning client relationships to a director of client services, reducing their direct client involvement to 20% of revenue, the buyer would likely have maintained the 6x multiple with 75% paid at closing — worth an additional $960,000 in upfront cash to the seller.
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