How to Measure the Owner’s Personal Influence on a Company’s Goodwill

February 05, 2025

by a searcher from Pontificia Universidad Catolica de Chile in Santiago de Chile, Región Metropolitana, Chile

Beyond gathering the logical information on margins, revenues, assets, and customer diversification, it is crucial to assess how the current owner’s personal influence affects key commercial relationships. This involves evaluating whether agreements with customers and suppliers rely directly on the trust or personal connection with the owner, and if there is a risk of these relationships weakening after their departure. Factors such as the stability of commercial contracts, customer loyalty to the brand rather than the individual, and the level of institutionalization in sales and procurement processes are critical to consider. Identifying these elements allows for a more accurate adjustment of the goodwill valuation, ensuring it reflects the company’s intrinsic value rather than the owner’s presence.

What tools or strategies have you used to address this analysis in your acquisition processes?

Reply by a searcher
from The University of Michigan in Ann Arbor, MI, USA

Thanks for the tag Luke. My view on this is that it really depends on the size of the deal and/or company. For small scale acquisitions (i.e. SDE of $1m or less) relationships matter greatly especially if the business has no clear differentiation and your products or services can be easily substituted or replaced by others. You can certainly look at customer concentration - the wider your customer base is the less risk/impact on ownership change. If they have existing long term contracts that is obviously a big plus as well. At the end of the day, the easiest way is to spend some time to shadow the owner and truly understand his level of engagement and influence internally and externally. You will probably get a better qualitative answer if you are able to understand his level of engagement internally and externally.

Reply by a searcher
from London Business School in Sevenoaks, UK

I think you have to start from the position of assuming the owner has very significant personal influence unless shown compelling evidence to the contrary. If the owner has really professionalised/ institutionalised the business to the extent he/she is surplus to requirements arguably he/she would be selling at a higher multiple to a more sophisticated buyer.

For the owner you can structure the right mix of "carrot and stick" incentives (e.g. deferred money, earn out, minority equity, restrictive covenants etc) but consider if the key relationships reside in a senior employee you will have much less leeway -- non-competes in employment contracts are significantly weaker than what you can achieve in a sale contract (not legal advice - consult your lawyer obviously).

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