Half of the company's value leaves with a single person.

Why one person can reduce a company's value by hundreds of thousands to millions

A buyer does not pay for a company simply as a collection of assets and contracts, but for its ability to generate profit long after the transaction is completed. If key customer relationships, technical know-how, or business contacts are held by a single person, the company's value is actually largely the value of that individual – and that does not transfer automatically with the transaction. In transaction practice, this is known as key man risk, i.e., the risk of a company's dependence on a single key person.

In the practice of selling a company, this risk manifests in three typical situations that a buyer recognizes upon their very first introduction to the business. The sales director personally knows and manages relationships with major customers, so their departure threatens revenue itself. The technical director is the only one who understands a key manufacturing process or software architecture, so their departure threatens operations. The owner themselves is the face of the company to banks, suppliers, and customers, so a transaction without them loses the credibility the company has enjoyed so far.

The more prominently these situations come to light during due diligence, the more heavily the buyer will reflect them in the valuation or transaction structure – through a lower multiple, a deferred purchase price tied to future performance, withholding a portion of the price, or conditions that bind the key person to stay longer than they would wish. It is impossible to quantify the impact universally, as it depends on how large a share of revenue or operations the key person holds. How such an offer is structured is described in our article on company acquisition and sale.

What a buyer looks for during due diligence to uncover the risk

The investigation focuses on dependence on a key person through standard questions: who specifically negotiates with the largest customers and whether this relationship is documented outside of that person's head, whether there is backup/redundancy for key positions, and how long the company functions during periods when the key person is unavailable, such as during vacation or illness.

The second area of questioning is the concentration of contractual and business relationships on a specific individual, rather than the company as a whole. If a key customer has a contract tied to personal trust in a specific manager, without a formal framework that would survive their departure, it is a clear signal of dependence. The same applies to relationships with suppliers, banks, or key creditors if they are established personally rather than institutionally.

The third area is the documentation of know-how. If written procedures, manuals, or technical documentation are missing and everything is stored only in the head of a single technician, the buyer risks losing the ability to operate the company at its current level after the transaction upon that person's departure. This gap is quickly identified in due diligence, as the seller usually lacks a satisfactory answer to the question "where is this documented?".

The fourth area, which the buyer examines just as carefully as the first three, is the compensation structure of the key person and what keeps them in the company today. If a key manager lacks a long-term incentive component and only receives a fixed salary, their economic motivation to remain after a change of ownership may be weaker, and the buyer takes this into account when structuring the offer. Conversely, a manager with a profit share, share option, or other form of long-term participation has an additional reason to stay and support a smooth transition.

The fifth area is the history of personnel turnover in key positions. A company that can demonstrate that the handover of commercial or technical leadership took place without any disruption to customers or operations thereby proves redundancy. However, high turnover in management itself can be a risk signal, so the buyer examines its causes and impacts – just as they would with a company where the same person has held a key position for fifteen years and the question of who would replace them has never been addressed.

Retention program: how to keep a key person throughout the transaction

The fastest tool to mitigate risk for transaction purposes is a retention bonus tied to the successful completion of the sale and remaining with the company for an agreed period thereafter. The bonus can be split into multiple parts – for example, a payment upon completion of the transaction and further payments conditional on the key person remaining in the company for a certain period and actively handing over their agenda to the new management. The length and distribution of payments are determined by the specific transaction, not a fixed template.

A retention program works best when set up well in advance of starting the sales process, rather than as a reaction to a buyer's demand during negotiations. For a planned sale, it can make sense to start a year or more in advance. This way, the key person learns about the sale plan at a controlled moment and is motivated to stay, rather than finding out about the upcoming sale by chance and reacting by leaving.

The second function of a well-structured retention program is spreading the risk among more people. Instead of having a single key person with a retention bonus, it makes sense to involve the entire core management team, as buyers usually value a broader management team more than dependence on a single individual, even if well-compensated.

The third function, which is often forgotten, is linking the retention program to specific, measurable handover tasks, rather than just mere physical presence in the company. The agreement should specify exactly what the key person will do after the transaction – how many customer relationships they will formally introduce to the new management, what procedures they will document, and whom they will train as their successor. Without such specific tasks, there is a risk that the key person will remain in the company but fail to actually hand over the agenda, meaning the risk persists even after the entire bonus is paid.

Non-compete covenants implemented before the sale, not after

In addition to retention, preparing a company for sale includes covenants that prevent a key person from competing immediately after their departure. For employees, such a non-compete clause is governed by the Labour Code under Czech legislation and has strictly defined conditions without which it will not stand; for other key persons, different instruments are used.

A non-compete clause can only be agreed with an employee if it can be reasonably required of them with regard to the nature of the information, knowledge, and work or technological procedures they acquired from the employer, the use of which by a competitor could seriously impair the employer's activities (Section 310(2) of the Czech Labour Code). The clause may restrict the employee for a maximum of one year after the termination of employment, and monetary compensation of at least half of the average monthly earnings for each month of compliance is always due.

If a contractual penalty is agreed in the clause, payment of the penalty terminates the employee's obligation under the non-compete; the amount of the penalty must be proportionate to the nature and significance of the agreed non-compete restriction (Section 310(3) of the Czech Labour Code). A penalty that is too low therefore allows the key person to simply buy their way out of the restriction. The employer may only withdraw from the clause during the term of the employment relationship, the employee may terminate it if the employer fails to pay the compensation within 15 days of its due date, and the clause, withdrawal, and termination must all be in writing.

If the key person is an executive director (jednatel) or another member of a statutory body, or a contractor outside of an employment relationship, the employee non-compete clause under Section 310 of the Czech Labour Code does not apply to their relationship with the company. The non-compete restriction for executive directors set by the Business Corporations Act is tied to the term of office; post-departure restrictions must be agreed in the agreement on the performance of office or in a separate agreement. How to set up such a clause and where its limits lie is described in our article on non-compete clauses in commercial relationships.

If the key person is the co-owner themselves who is leaving after the sale, there is also the question of how to structure the terms in the share transfer agreement itself. Such an agreement usually includes a covenant on how long the departing co-owner will remain available to hand over the agenda and under what conditions they may engage in a similar business after the sale. What a share transfer agreement should generally contain is discussed in our article on transferring a share in an s.r.o..

How long a restriction period and how high a compensation to set for a specific person depends on how sensitive the information and relationships they hold are and how easily the buyer can replace them – which is why the Czech legal team at ARROWS law firm assesses this individually for each key position.

What the law allows and where the limits of know-how protection lie

In addition to a contractual non-compete clause, the company is also protected by the general regulation of trade secrets under Czech legislation, which applies regardless of whether a non-compete was agreed. Competitively significant, identifiable, valuable, and in the relevant business circles normally unavailable facts related to the business, which the owner adequately keeps confidential, constitute a trade secret (Section 504 of the Czech Civil Code).

An outgoing employee who unauthorizedly discloses a trade secret to a competitor or uses it himself in his own business commits unfair competition (Section 2985 of the Czech Civil Code), and the company may, among other things, seek an injunction against such conduct and compensation for damages incurred. However, this protection does not replace a non-compete clause – it only covers actual trade secrets, not the general experience or qualifications that a person takes with them as part of their professional history.

The mere fact that a former employee starts competing and acquires some of their former employer's customers does not in itself constitute unfair competition. The Czech Supreme Court emphasized this year that unfair "poaching" consists of luring away employees or business partners by unfair means, and described a non-compete clause with one's own people as a legitimate tool for protecting know-how (judgment File No. 23 Cdo 2523/2024). Without a valid clause, a company will generally not prevent a key person from leaving for a competitor.

This conclusion applies equally to a situation where the key person leaves before the sale and to a situation where they leave after it. Therefore, when valuing a company, the buyer does not only calculate the risk of departure as of the transaction date, but also the risk that the same person will decide to leave at any time in the following years if nothing but general decency holds them back. The decisive factor then is whether the key person uses unfair means upon departure – abusing trade secrets, confidential data, or otherwise acting contrary to the honest practices of competition.

How to reduce a company's dependence on a single person in the long term

A retention bonus and a non-compete clause address the risk in the short term and in connection with a specific transaction. The long-term solution lies in systematically distributing the knowledge and relationships of a single person among more people and documenting them outside of their head, long before a sale is even considered.

The first step is to document key processes and relationships in a form that can be taken over by anyone else in the team without unnecessary delay. This includes a manual of key customer relationships with negotiation history and terms, a description of technological procedures accessible to more people than just a single technician, and an overview of contractual relationships with suppliers and banks maintained at the company level, rather than just through the personal contact of a specific manager.

The second step is building redundancy in key positions, typically by introducing a deputy or a second point of contact for the largest customers. A company that can demonstrate it functioned even during the long-term absence of a key person appears significantly more credible to a buyer than a company lacking such experience.

The third step is the gradual involvement of the broader management team in negotiations with customers and suppliers even when a sale is not yet on the agenda. This also paves the way for a smooth handover of the agenda after the transaction, as the new contact persons are known to customers and suppliers before the sale itself takes place.

The fourth step is setting up long-term incentives that tie key people to the company as such, rather than to the person of the owner. A profit share, a long-term bonus program, or an employee stock ownership plan (ESOP) gives managers a reason to build company value regardless of who currently owns it – and it is precisely this motivation that survives a change in ownership structure better than any one-off retention bonus tied solely to the moment of sale.

The fifth step, which is often neglected, is the regular assessment of dependence on key people as part of routine company management, rather than just preparation for a sale. A company that asks itself once a year what would happen if a key person left tomorrow, and adjusts its work organization accordingly, is significantly better prepared at the moment of an actual sale than a company addressing this question for the first time only when a specific offer is on the table.

Risks of dependence on a key person when selling a company

Summary

When valuing a company, the buyer takes into account the risk that the departure of a single key person will also mean the departure of customers, technology, or the trust on which the company stands. This article has shown that this risk can be mitigated in two ways: in the short term, through a retention program and a non-compete clause implemented well in advance of the sale, and in the long term, by distributing knowledge and relationships among more people.

For a company owner, this leads to a single decision that must be made well in advance of the planned sale, not when the first prospective buyer appears. The earlier retention and non-compete clauses are set up, the lower the risk that the key person will react by leaving at the most sensitive moment for the company.

The Czech legal team at ARROWS law firm prepares retention programs and non-compete clauses in accordance with the Labour Code, assesses the scope of trade secret protection, and advises on how to prepare a company for sale so that dependence on a single person does not drive down its price. The firm also connects clients looking for an investor or buyer with those offering such opportunities. A deeper overview of the entire company sale process is offered in the book How to Sell a Company.

Write to us at consultation@arws.cz or browse our practice for company sales and transaction advisory.