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 as a mere 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 person – and that does not transfer automatically with the transaction. In transactional practice, this is called 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 first introduction to the company. The sales director personally knows and manages relationships with major customers, so their departure threatens revenues. The technical director is the only one who understands the key production 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 portion of the price tied to future results, a holdback of part 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 revenues or operations the key person holds. How such an offer is structured is described in the article on company acquisition and sale.

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

The review 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 capability 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 person, 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 set up 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. This gap is quickly identified in due diligence because the seller usually does not have 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 stay after a change of ownership may be weaker, and the buyer takes this into account when structuring the offer. Conversely, a manager with a share in profits, a stock option, or another 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 sales or technical leadership took place without any disruption to customers and operations thereby proves its backup capability. 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 succession 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 to staying for an agreed period thereafter. The bonus can be divided 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 by a fixed template.

A retention program works best if it is set up well in advance of the start of the sales process, rather than as a reaction to a buyer's request 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, instead of finding out about the upcoming sale by chance and reacting by leaving.

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

The third function, which is often forgotten, is linking the retention program to specific, measurable tasks of handing over the agenda, rather than just mere physical presence in the company. The contract 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 who they will train as their successor. Without such specific tasks, there is a risk that the key person will remain in the company but will not actually hand over the agenda, and the risk will persist even after the entire bonus is paid.

Non-compete agreements implemented before the sale, not after

In addition to retention, preparing a company for sale also includes agreements that prevent the key person from competing immediately after their departure. For employees, such a clause is governed by the Labor Code and has precisely defined conditions without which it will not stand; for other key persons, other tools 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 Labor Code). The clause may restrict the employee for a maximum of one year after the termination of employment, and they are always entitled to monetary compensation of at least half of their average monthly earnings for each month of compliance with the commitment.

If a contractual penalty is agreed in the clause, payment of the penalty terminates the employee's obligation under the clause; the amount of the penalty must be reasonable in relation to the nature and significance of the agreed non-compete restriction (Section 310(3) of the Labor Code). Therefore, a penalty that is too low 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 be in writing.

If the key person is a managing director (jednatel) or another member of a statutory body, or an independent contractor outside of an employment relationship, the employee non-compete clause under Section 310 of the Labor Code does not apply to their relationship with the company. The non-compete restriction of a managing director set by the Business Corporations Act is tied to the term of office; restriction after departure 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 the article on non-compete clauses in commercial law relationships.

If the key person is the co-owner themselves who is leaving after the sale, there is also the question of how to regulate the conditions in the share transfer agreement itself. Such an agreement usually includes provisions 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 line of business after the sale. What a share transfer agreement should generally contain is discussed in the article on transfer of 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 lawyers of the Prague-based ARROWS law firm assess 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, which applies regardless of whether a clause was agreed. Competitively significant, identifiable, valuable, and in the relevant business circles normally unavailable facts related to the business, which the owner keeps confidential in an appropriate manner, constitute a trade secret (Section 504 of the Civil Code).

An outgoing employee who unauthorizedly discloses a trade secret to a competitor or uses it themselves in their own business commits unfair competition (Section 2985 of the Civil Code), and the company can, among other things, demand that they refrain from such conduct and seek 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 qualification that a person takes with them as part of their professional history.

The mere fact that a former employee begins to compete and acquires some of their former employer's customers does not yet constitute unfair competition. The 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, as well as to a situation where they leave after it. Therefore, when valuing a company, the buyer considers not only the risk of departure as of the transaction date, but also the risk that the same person may decide to leave at any time in the following years if nothing but general decency holds them back. What is decisive then is whether the key person uses unfair means upon departure – misuses trade secrets, confidential data, or otherwise acts contrary to the good morals of competition.

How to reduce a company's dependence on one 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 one person's knowledge and relationships among more people and recording them outside of their head, even before a sale is even considered.

The first step is to document key processes and relationships in a form that can be taken over without unnecessary delay by anyone else in the team. 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 in the personal contact of a specific manager.

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

The third step is the gradual involvement of a broader management team in negotiations with customers and suppliers even at a time when a sale is not yet on the agenda. This also prepares the ground 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 bind key people to the company as such, rather than to the person of the owner. A share in profits, a long-term bonus program, or an employee stock ownership plan (ESOP) gives managers a reason to build company value regardless of who the current owner is – and it is precisely this motivation that survives a change in ownership structure better than any one-time retention bonus tied exclusively 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 based on the answer, is significantly better prepared at the moment of an actual sale than a company that addresses 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 one key person will also mean the departure of customers, technology, or trust on which the company stands. The article showed that this risk can be mitigated in two ways: in the short term by 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 implies a single decision that should be made well in advance of the planned sale, not when the first interested party appears. The earlier retention and clauses are set up, the lower the risk that the key person will react by leaving at the very moment that is most sensitive for the company.

The lawyers of the Prague-based ARROWS law firm prepare retention programs and non-compete clauses in accordance with the Labor Code, assess the scope of trade secret protection, and advise 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 review our practice for company sales and transaction advisory.