Hi Reader

Today I’m going to talk about something that comes up frequently in deals I review—seller or key employee dependency.

It’s more common than most buyers think, and it’s one of those risks that can quietly derail your first year of ownership if you don’t catch it early.

Why should you care?

Because you’re not just buying financials. You’re buying continuity.
And if the seller (or one key team member) is the glue holding everything together, then you're not buying a system—you’re buying a person.

That’s a big problem unless you know how to spot it early and structure around it the right way.

Let me walk you through how I help buyers handle this.

But first let's talk about a couple of common mistakes to avoid.

What Not to Do (If You Want to Survive your First Year of Ownership)

This is one of those risks that feels easy to ignore.
The seller seems helpful. The business is performing. The team looks stable enough on paper.

But here’s what I see buyers do—over and over—and regret later:

❌ “Let’s get through LOI, and I’ll dig into it then.”

Big mistake.

If you already sense that one person is holding things together, don’t wait to validate it.
Dependency risk needs to be surfaced before you lock in a price and structure (and start writing diligence provider checks)—when you still have leverage.

❌ “The seller seems well-meaning. I’m sure they’ll help post-close.”

Intentions are not systems.

Even great sellers get busy, burnt out, or emotionally detached after closing.
Unless it’s built into the deal—with structure and incentives—you’re relying on hope, not a handoff.

Remember, many if not most sellers are selling since they're tired and done. Some even have health issues themselves or in the family to contend with.

❌ “This seems like a solid team. I’m sure it’s not a big deal.”

If you haven’t verified it, you don’t know.

I’ve seen businesses with 30 employees that still rely on one person to make every decision, deal with customers, or be the "face of the companY" with critical contracts. .
Never confuse headcount with redundancy.

If your gut is raising questions about seller or employee dependency, listen to it.

Waiting until post-LOI to confirm it, or trusting vague promises, puts you in a weak position—financially and operationally.

Catch it early.
Structure for it.
And protect yourself on the way in.

9 Questions to ask (Before You Sign the LOI)

This is where you spot dependency risk before it surprises you post-LOI so you can structure while you still have maximum leverage.
Use the following short list of questions to spot the telltale signs of seller (or key employee) dependency:

1. Who actually runs the day-to-day?

Ask: “If you disappeared for two weeks, what breaks?”
What you’re looking for: Whether the business actually runs on systems—or just on the seller’s memory and fire-fighting.

2. Who do key customers, vendors, and employees rely on?

Ask: “If I called your top 5 customers or vendors, who would they name as their go-to?”
Verify: Is there documented handoff capability or is it all relationship-based?

3. Are there standard operating procedures (SOPs)?

Ask: “Do you have SOPs for your core functions? Where are they stored?”
No need for fancy manuals—but if it’s all in the seller’s head, that’s a red flag.

4. What does your current org chart look like?

Ask: “Can you walk me through your team roles and who owns what?”
You're looking for real delegation—not just people “helping” while the seller still makes all the decisions.

5. Is there a license-holder or linchpin employee?

This comes up all the time in trades and professional services.

Ask:
– “Who holds the license?”
– “What happens if that person quits?”
– “Have you ever had a licensing lapse?”

Verify: If a key license or certification ties directly to the seller or one employee, that’s a single point of failure.

6. How are sales generated—and who closes them?

Ask: “Who’s the face of the business during new client onboarding or sales calls?”
If the answer is “me,” you’ll need to plan a face transition.

7. How involved is the seller in team management?

Ask: “Who handles hiring, firing, and reviews?”
Sometimes sellers say they’re hands-off… but dig a layer deeper and they’re still the heartbeat of culture and accountability.

8. What does a typical week look like for the seller?

Ask for a real breakdown—not “strategic oversight” fluff.
Get them to talk through Monday to Friday, hour by hour. You'll quickly see whether they’re actually semi-absentee—or glued to the engine room.

🚩 9. Have you ever tried stepping away before?

Ask: “Have you ever taken a 2+ week vacation without checking in?”
If the answer is no—or if everything fell apart while they were gone—you’ve got your answer.

It's Not Always the Seller

Sometimes the seller really has stepped back.
They’re not in the weeds. They’ve delegated well. They take real vacations.

And that’s great…
​until you realize all that responsibility now sits on one key employee.

Maybe it’s the GM who’s been there 18 years.
Maybe it’s the lead estimator, the licensed tech, the right-hand ops manager.
They’re the ones who hold the team together, know every customer by name, and can run circles around the SOPs.

But if they walk after closing?

You're not buying a system.
You're just inheriting a new form of single-point failure.

That doesn’t mean walk.
It means plan.

And in the next section, I’ll walk you through how.

Tools for Structuring Around Seller/Key Employee Dependency

Here are the tools I typically use to help buyers structure around seller or key employee dependency. All of them are SBA 7(a) compliant.

1. Forgivable Seller Note

If post-close reality turns out messier than promised, a forgivable note can save the deal—and your cash flow.

You can structure forgiveness to kick in if:

• Revenue drops
• Key customers leave
• Seller’s absence causes unexpected disruptions
• Systems don’t work as independently as claimed

If things go smoothly, the seller gets paid.
If not, your repayment obligation adjusts with the performance.

Pro tip: if Seller balks at outright forgiveness, negotiate for a "pause" instead. Put the note on full standby for 6 months or a year for you to stabilize revenues. You get some time to fix the problem - Seller gets paid in full (eventually).

2. Performance-Based Escrow

Hold back part of the purchase price at closing—release it only if defined milestones are hit:

• Key customer retention (for a certain period of time)
• Revenue doesn't drop (below historic target)
• Operational handoff completion

Important: SBA rule: Escrow must come from your equity (not loan funds). So, if the purchase price is $4M and you're bringing $450K, then the maximum the performance escrow can be would be $450K.

Performance escrows are underutilized (and sometimes underappreciated) but here's the thing:

Pro tip: In high-risk deals, I’ve seen both used together:
​-> Forgivable note + performance escrow = layered protection.<-

3. Tiered Transition Services Agreement (TSA)

You can’t “wing it” when you need a seller to stick around.

a) Spell out their post-close involvement in stages:

• First 30 days: Full-time involvement
• Next 60 days: Scheduled calls, warm intros, co-leadership
• Balance of 12 months: “As needed” availability for coaching, support, and backstop help

b) Define clear deliverables. Especially when you need them to transfer what's "in their head" you can't be vague on what you need them to do during the transition. Learn about their role during diligence and spell out what you need for a clean transition.

For particularly large deals or high seller dependency risk you might even consider a combnation of a paid transition (ie some of the purchase price comes to Seller in the form of consulting fee during this period) and a Transition Escrow. This way, a meaningful chunk of the purchase price is only paid to Seller if they successfully transition the business to you.

4. Key Employee Retention Plan

If a key person walks, it could crater your first year.

Here’s how to protect against it:

• Make their continued employment a closing contingency (if they're not employed at Closing, you can't make the business work - and shouldn't need to close. And if you paid a good faith deposit at the beginning of the deal make sure you get it back!)
• Offer a stay bonus, jointly funded with Seller. FInancially incentive the employee to stay for 12-24 months after closing
• If they leave post-close, require the seller to backfill the role or absorb part of the impact (written into the TSA)

5. Seller Retains Equity (<20%)

This is one of the most underutilized tools in the box.

Have the seller roll a minority equity stake into the new entity—less than 20%

✅ Under SBA rules, <20% keeps them from having to guarantee the loan long-term
⚠️ But they do have to personally guarantee for the first 2 years
✅ Allows you to offer them an employment agreement with upside
✅ Gives them a “second bite at the apple” if you grow the business together (and you buy them out later)

Just be sure to:

• Define a clear path to buy them out later
• Put guardrails around governance and control
• Frame it as a partnership, not a handcuff

Now Back to You

Now you know what to look for—
and more importantly, how to structure around it.

Whether the business depends on the seller, a license-holder, or a key employee, you don’t have to walk away.

You just need to diagnose the real risk, bring the seller into the conversation early, and use the right tools to protect yourself.

There’s no need to guess.
There’s a playbook now.

Use it.

Stay Sharp!

- Eric

Buyers Black Book

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