Yet businesses run by One Man Shows often run into challenges when trying to engage in any type of equity transaction, whether that be raising capital or selling their company. This has to do with the real or perceived risks of doing transactions with such companies:

• Should a One Man Showbecome sick, incapacitated or leave the firm, the firm may become ungovernable or lose profitability. In this event, key relationships with clients, staff or suppliers may be lost, causing further disruption, which may substantially add to the risk associated with investing in a particular enterprise.

• Executing a transaction, in particular satisfying the informational requirements of a due diligence and managing a complex negotiation, often requires the collective efforts of a team. A One Man Show may become the bottleneck within his own firm, simply incapable of handling the daily operations on top of the demands placed on him by the transaction.

• Enterprises run by One Man Shows frequently lack the systems (whether IT platforms, accounting systems, or corporate governance procedures) that can sustain profitable growth. The methodology behind the company’s operations may exist only inside the head of the One Man Show, have been jotted down on the back of an envelope, or be left in an excel spreadsheet, never having been communicated throughout the organization. The lack of such systems makes the potential loss of one key individual all the harder for the enterprise to bear. It also creates various limitations to growth. One should be particularly careful of projecting past rates of growth into the future without making appropriate investments in systems and staffing.

Of course, whether a business is run by a One Man Show is seldom a question that is black or white. When assessing an acquisition target, an investor should assess the degree to which their target is run by a One Man Show as it may have a serious impact on the valuation (e.g. in a Discounted Cash Flow Model the appropriate investments to sustain growth should be reflected) or may even in the end be a deal breaker. One of the reasons that larger firms are typically more attractive to investors is that they are less beholden to one owner-manager. Similarly, publically-traded stock exchange-listed firms typically trade at higher multiples than owner-managed firms, in part because they have greater depth and breadth of management.

As an investor in a firm managed by a One Man Show, there are ways of mitigating risk. For example, one might consider an earn-out transaction, where a portion of the purchase price is paid after closing (see our earlier article on this subject). Or one could appoint staff to work alongside the One Man Show.

From the other side, what can a One Man Show do to avoid being disappointed in the valuation of his firm, or even becoming a deal breaker himself? In a nutshell, empower people and build systems. This is easier said than done and may run counter to the personality of the owner-manager, who often enjoys exerting a high degree of control. Some owner-managers are so dominant that they are unable to attract into their immediate circle individuals who are highly empowered and capable of taking decisions on their own. However, perhaps the realization that empowering people and building systems may add substantially to his own net worth may provide the One Man Show with sufficient financial incentive to consider such a course of action. Ultimately, it may mean the difference between being able to raise financing for one’s business and eventually sell one’s business or not.