When the Owner Is the Business: How Dependence Derails Deals Introduction

There has never been a more advantageous time to be the owner of a lower middle market business and, by extension, a lower middle market M&A advisor. Across the M&A landscape, buyers of varying types – but especially financial buyers, and private equity firms in particular – are actively seeking opportunities to deploy capital. The volume of dry powder is at record levels, with recent estimates placing the figure between $1.1 trillion¹ and $1.6 trillion² across PE as a whole.

This capital is not concentrated in a handful of firms. It is spread across an ever-expanding field of private equity sponsors, each under pressure to put money to work. The result is heightened competition, with quality businesses being acquired at healthy multiples. For sellers, this competition creates favorable dynamics. For advisors, it creates an environment where positioning and preparation can have a direct and meaningful impact on outcomes.

Firms have become more flexible and are demonstrating a willingness to underwrite a wider range of business models and transaction scenarios than they may have considered in previous cycles.

Yet, even with this abundance of capital and flexibility, there remains one factor that reliably derails transactions. In a competitive environment where many issues can be addressed through structure or negotiation, this particular challenge is almost always fatal to a deal.

Owner Dependence: How It Unraveled a Promising Deal

A company that cannot function independently of its ownership, for the most part, ceases to be an asset with transferable value.

Earlier this year we identified what seemed a promising acquisition target in a sector we were highly enthusiastic about. At first glance, the opportunity seemed compelling:

  • Multi-decade operating history
  • National footprint
  • Consistent 40%+ EBITDA margins
  • More than $5 million in average EBITDA over the trailing five years

Upon obtaining the CIM and beginning initial diligence, issues within the business began to surface. The company had:

  • No standardized operating procedures across locations
  • No consistent software systems
  • No centralized CRM
  • No coordinated marketing efforts

Although these were negatives, none (individually or even as a group) could have been considered deal killers. Each represented a potential area of improvement and optimization post-deal that could help increase efficiency.

What ultimately killed the deal was owner dependence.

The business had multiple shareholders spread operationally across several locations, each deeply involved in day-to-day operations and directly responsible for the majority of revenue at their respective site. Without them, each location, and therefore the business as a whole, could not function.

This single factor, the inability of the enterprise to operate without its owners, rendered what could have been a healthy eight-figure transaction into a deal with no assignable value. For the sellers, it meant walking away from a meaningful exit. For their advisors, it meant walking away from a healthy fee.

Lessons for Advisors

The transaction described above, while unique in its specifics, reflects a common reason why deals in the lower middle market fail to close.

It is not unusual for a company’s earnings to outpace the way its owner continues to run the business. Many entrepreneurs, by nature, are highly hands-on. They often start businesses because they value independence, yet over time that independence evolves into an intense involvement in every aspect of day-to-day operations. The unintended consequence is that the business becomes increasingly reliant on them for its continued success.

If this dynamic is not addressed, the very independence that motivated an owner to launch their business can transform into the constraint that prevents them from achieving freedom at exit. What once enabled autonomy becomes the very factor that binds them at the most critical stage of ownership.

For this reason, advisors must engage owners well before a potential sale to highlight the importance of creating separation between the owner and the enterprise. Only when that separation exists can owners fully unlock the transferable value embedded within their business and realize the full outcomes they envisioned when they first set out on their entrepreneurial journey.

Practical Steps to De-Risk Owner Dependence

Helping a client build separation between owner and enterprise is not theoretical, it requires deliberate, practical steps taken well before a sale process begins. Advisors should encourage owners to focus on the following areas, which represent some of the most effective ways to reduce owner dependence and create a transferable, financeable business:

Document Systems, SOPs, and Training: Buyers look for continuity. By formalizing processes in writing, developing standardized operating procedures, and maintaining a training framework, the business becomes less reliant on any single individual. This creates consistency across teams and makes it possible for new hires or managers to step in without disruption.

Install or Elevate Professional Management: A strong second layer of leadership is one of the clearest signs of an owner-independent company. Bringing in or promoting managers who can oversee daily operations signals to buyers that the enterprise can function without constant owner oversight. It also demonstrates scalability – a critical lens through which most buyers, especially financial sponsors, evaluate potential acquisitions.

Transfer Customer and Vendor Relationships: It’s common for longstanding customer and supplier relationships to sit with the owner. Transferring these relationships to senior managers or account leads ensures that revenue and supply chains remain stable post-close. This step reduces concentration risk tied to a single individual and provides tangible evidence that the business can sustain its operations through a transition.

The Lake Como Test

Every business is different, and no two owners are entangled in their companies in exactly the same way. A useful exercise is for advisors to sit with their clients and walk through what we call the “Lake Como Test” as a mental exercise.

If the owner suddenly left for a six-week, spontaneous summer holiday to Lake Como with no phone and no email, which parts of the business would keep running, and which would grind to a halt?

Not every business can realistically operate without a leader for an extended period of time – and that is not the point. The test is simply a way to expose vulnerabilities, highlight potential areas that need to be strengthened, and provide a concrete framework for reducing owner dependence ahead of a sale.

Conclusion

There is an abundant supply of capital in today’s markets, and buyers – especially financial buyers – are heavily incentivized to deploy it. For well-positioned lower middle market businesses, it is an ideal time to come to market, but timing alone is not enough.

Owners must come prepared, having addressed the structural issues that can derail a transaction. Among these, few are more damaging than owner dependence. Eliminating this risk in advance is one of the most effective ways to ensure a successful outcome.

References
EY. US Private Equity Pulse: April 2025. Ernst & Young. Retrieved from https://www.ey.com/en_us/insights/private-equity/pulse
Ropes & Gray. US PE Market Recap: 2024 in Review. January 2025. Retrieved from https://www.ropesgray.com/en/insights/alerts/2025/01/us-pe-market-recap

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