Buying a Plumbing Business with a Key Man Risk worth it?

October 02, 2024

by a searcher from Narsee Monjee Institute of Management Studies in Toronto, ON, Canada

Considering to buy an 8 year old Plumbing Business with $1.5M Rev (and growing) run by 3 Plumbers. The Owner is also from a plumbing background but he’s not doing the jobs anymore. The Lead Plumber who is also the Service Manager is the younger brother of the Owner. The owner is relocating out of the country to pursue other interests. The brother is working on getting his Master plumbing license.

I met the owner and he shared that the brother is happy to continue working as a plumber and does not want him to take over as he is also not the right profile to lead the company. I’m meeting the brother as well and will ask him if he is ok with me taking over. Owner suggested me to consider incentivising the brother to stay back.

The owner has agreed to stay back for a longer transition but my question is should I enter this business where there is a key man risk of not just the owner but also the brother?

I want to incentivise the brother to stay on. Are there any successful models?

Should I consider including a higher seller note and earn outs contingent on the brother staying to mitigate this risk?

Reply by an intermediary
from California State University, San Bernardino in Stratton, CO 80836, USA

I once helped a couple of buyers regarding a small surveyor company with the owner's son being the key person running the company. Both buyers were employees of the very same company. The son assured them he had no desire to run the company and was looking to return to school for another career. We developed several due diligence questions for them to pursue back with the owner. Since I did not hear back from them over several weeks, I followed up to see how it went. They told me that upon further investigation, the owner started dramatically reducing the price and then offered it free to both buyers. Eventually, they learned that the owner was facing multiple lawsuits and also had found a way to pillage the employees' retirement accounts to pay company expenses. Coming from a family of relatives who always prefer to transfer their companies to family members I get uneasy when I hear about situations where the key people (being family related and already running the company) have no desire to take over the company. Personally, I would tread very carefully or move on to a better probability.

Reply by a professional
from University of Michigan in Detroit, MI, USA

Hi ^redacted‌, have you considered granting the brother a minority stake in the business? This would grant him upside if the business does well (which he can impact). And as a the majority partner, you would retain full control of the company. Of course, taking on a partner comes with its fair share of issues too.

Otherwise, yes earnouts and seller financing (including debt forgivability) are both useful tools. Generally speaking, you should always push for as much seller financing as you can get. It is one of the best risk mitigation tools buyers have.

But perhaps consider the simplest option. Agree to pay the brother an above market salary and a performance bonus at the end of each year. After all, the brother will leave if he wants to leave, regardless of clever risk mitigation methods tied up in the deal. But if he is motivated by money... All I'm saying is golden handcuffs are a real thing and very easy to execute.

+15 more replies.

Join the discussion