Valuation Impact from CEO/Owner Death?

January 20, 2021

by a searcher from Indiana University at Bloomington in Chicago, IL, USA

We're in the early stages of negotiation with a seller & broker. Shortly after submitting an IOI the CEO/Owner passed away.. Two senior co-workers are managing the business, but their level of attribution is tied more to systems and processes rather than sales and customer relations.

Has anyone been in a process where the CEO/Owner or key man has passed away? If so, could you please provide some thoughts on how you handled the situation or would have handled the situation?

We're not trying to low-ball the seller, but the offer must be revised to reflect this unfortunate material event. Would appreciate input as I start creating scenario analyses.

Many thanks. redacted

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Reply by an investor
from The University of Chicago in Chicago, IL, USA

It is an unfortunate situation but in reality, the value of the business has been diminished (most likely in a significant way). I would attempt to meet with the family (not solely the broker) and explain that i.) you are quick to move / close / and undertake responsibility for the business and ii.) that your revised deal structure, which now includes a contingent deferred purchase price component (earnout, etc.) is the only mechanism available for the family to reap the max purchase price that you are willing to pay. If you purchase the business as originally planned with little or no adjustment for the circumstances, it would be a mistake in my view. Just like the family & broker who may incorrectly perceive you as attempting to take advantage of the circumstances, the reality is that all of the company's competitors are NOW doing exactly that ('... its sad, he passed, they will probably be going out of business now, ..."). Your situation is difficult but not uncommon. You may end up rejected by being the first to convey the reality, but the reality is what it is (another middle market business with no mgmt depth or succession plan). Good luck.

Reply by a searcher
from Stevens Institute of Technology in New York Metropolitan Area, USA

Joe - generally closely held companies have an unrealistic expectation of value since time invested in the business (years) equates to a premium price. With that said, the Owners or the top few individuals in the company own the key relationships both externally and internally. You have to evaluate how much the Owner contributed to driving the revenue and how he contributed to the culture. If his absence doesn't impact either adversely, then you can proceed with an acquisition based on your valuation metric. If the Owner's passing is creating uncertainty with the business - then you need to understand what the impact is and proceed accordingly.

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