A buyer is on the phone with the owner of an SME they are looking at. They ask how many hours a week the owner works and how much time they spend at the plant. The owner starts dodging the question, gets tense, beats around the bush. Until finally, almost embarrassed, they admit: “The thing is, I live in Mallorca. I go to the plant on Mondays and come back on Wednesdays.”
For the owner, it was embarrassing to admit. For the buyer, it was the best thing they heard in the entire conversation.
That story comes from Alex Espel, CEO of Inprisa, on Deale's Rainmaker podcast. And it neatly sums up one of the uncomfortable truths of the SME market in Spain: when everything in a business goes through one person, that company is worth less, sells worse, and is bought with fear. When the business runs without that person, it is worth more, attracts more interest, and changes hands faster.
This is called founder dependency. In M&A, it is probably the most important risk a buyer has to assess — and the one a seller needs to work on well before starting the process.
What the “bus factor test” means for an SME
In the software world, the concept of the bus factor became popular years ago: how many people would have to be hit by a bus for a project to grind to a halt. If the answer is “one,” the project is at structural risk.
In an SME, the question is the same; only the setting changes. If the owner walks out of the notary's office after signing the sale and gets hit by a bus — does the company keep running the next day? After three months? A year?
If the answer to any of those questions is “no, it stops,” the company has a founder dependency problem. This is not a detail: it is the first thing a serious buyer looks at, and the first thing that drags down the valuation multiple.
As Alex puts it in the episode:
“Ideally, there's a team and a structure that hold the company up. If you walk out of the notary's office and the bus hits you, that company keeps running.”
Dependency is a spectrum, not a yes-or-no question. In some companies, the owner is the sales, finance, operations, and emotional lead — all at once. In others, the owner sets the direction but day-to-day operations run on their own. The gap between one extreme and the other, in terms of value, can be a full turn of EBITDA multiple.
The signs a buyer spots right away
Not all red flags are equally red. But an experienced buyer identifies them on the first visit and uses them to calibrate the price, the required transition period, and the payment structure.
There is one sign that seems anecdotal but is brutally revealing: owners who need to review what every employee writes in their email signature. “If you have to manage your employees' email signatures, you can't have more than seven employees,” Alex sums up. It's not a criticism of the owner's style; it's physics. There are 24 hours in a day. If you spend them micromanaging signatures, you're not spending them talking to customers or thinking about the business.
Another typical sign: in the morning, at the workshop or the office, the team is standing around waiting for instructions. There is no system; there is a person. When that person doesn't arrive on time, doesn't arrive in a good mood, or doesn't arrive at all, the day doesn't get going.
And the subtlest of all: the owner is “always available.” They take calls at 10 p.m., answer WhatsApp messages on Sundays, open the plant on Saturdays. This is often presented as commitment. A buyer reads it as unsustainable. Without that person, that company doesn't work.
For the buyer: how to assess it during due diligence
Founder dependency doesn't show up in the financial statements. You won't find it in the annual accounts or in the corporate tax return (Modelo 200). It shows up in conversation, during the site visit, and in the real org chart — the one you can see, not the one in the PowerPoint.
Some specific questions a buyer should ask before signing an LOI:
- How many hours a week does the owner currently put in? And of those, how many are operational and how many strategic?
- Who makes purchasing decisions above €10,000? And above €50,000?
- What is the team's average tenure? Is there a second level of management with real autonomy, not just on paper?
- Is there operating documentation for critical processes (budgeting, quality, sales)?
- If the owner disappeared for three months, what three things would break first?
This is complemented by direct observation. A visit to the plant on any given morning tells you more than a spreadsheet. If nobody does anything until the owner arrives and gives instructions, you already have your answer. This whole layer is systematized in the operational due diligence stage.
The seller staying on after signing is the natural consequence of this analysis. A reasonable transition period is 6 to 18 months. Beyond 18 months, it usually means the dependency isn't transitional but structural — and that in itself is a red flag to negotiate before signing.
For the seller: how to reduce dependency and increase valuation
For a business owner preparing 12 to 18 months in advance, reducing personal dependency is one of the value levers with the best effort-to-impact ratio. It isn't glamorous. It's discipline.
The specific actions are usually these:
Document processes. Write down how things are done — commercially, operationally, administratively. Not to get an ISO certification or to impress anyone. So that someone else can do it without having to ask.
Build a second level. Even a small one. One person in operations and another in sales with real autonomy, not just a title. People who sign off on orders, close deals with suppliers, and respond to customers without going through the owner.
Step back gradually. Reduce your operational presence deliberately and in a monitored way. One week a month away. Then two. The first time the company runs without the owner is the first time that company commands a higher multiple.
Quantify current dependency. Know which customers are personal relationships and which are institutional. Which decisions over the past year went through the owner and which didn't. Having that map is what separates a credible argument at the negotiating table from a promise.
The effect on valuation is not marginal. With the same EBITDA, two companies can trade at 3.5x or 5x — and a big part of that difference comes down to exactly who holds the business up. For how a multiple is built and what drives it, see EBITDA multiples.
When dependency is high and you still want to sell
Not every SME can afford a year of preparation. And in many cases, the work hasn't been done. The deal is still viable, but its design changes.
The most common mitigation tools are:
- A longer transition period (closer to 18 months than 6) so the handover is orderly and knowledge is transferred.
- A larger deferred payment or clauses tied to operational continuity, instead of paying most of the price at signing.
- An earn-out if the dependency is concentrated in specific customers whose relationships need to be preserved. For when it makes sense and when it doesn't, see earn-outs in business sales.
- Looking for a hands-on buyer, not a fund. A searcher-type profile or a small strategic buyer who can step into operations from day one, with the current owner alongside them for the first 12 months.
- Quantifying clauses upfront. If failing to stay on for the agreed period has a cost, it's better to agree on a fixed amount at signing than to leave it open. More on this in less common clauses in the purchase agreement.
Founder dependency doesn't prevent a sale. But it shapes the type of buyer, the timeline, and the structure. Recognizing it in time is what prevents processes that fall apart during due diligence or, worse, contracts that end up in court two years later.
