Key Man Risk: The Hidden Threat to Agency Value

Hey there, Welcome back to Agency Finance Letters.

Recently, Alex Hormozi highlighted something that took me back to my banking days - Key Man Risk. It's a concept that can make or break your agency's value, whether you're planning to sell or not. Here are some key things to consider:

Understanding Key Man Risk

Key man risk is more than just over-dependence on any single person. In agencies, it manifests as a complex web of dependencies that can strangle growth and kill valuations. From founder-dependent sales to irreplaceable technical leads, the symptoms are varied but the diagnosis is the same: your agency is too dependent on specific individuals.

How Deep Does Your Key Man Risk Go?

Here's a quick reality check: Last month, a client tried taking their first proper holiday in three years. By day three, they were on their laptop handling "urgent" client requests. Sound familiar? Ask yourself:

• Can you actually step away for two weeks without your phone blowing up?

• Do clients skip your team and slide straight into your DMs?

• Is your pricing strategy locked in your head (or worse, a mess of spreadsheets only you understand)?

• Be honest: would revenue take a hit if you disappeared for a month?

If you're getting anxious thinking of any of these, you're not alone. But it's also a clear signal that your agency might be too dependent on you.

The Three Critical Danger Zones

Based on Hormozi's framework, agencies typically face three major risks that can severely impact their valuation:

• Founder Risk: When you're the bottleneck for key decisions, sales, or client relationships

• Team Risk: When key employees have no backup and critical knowledge isn't documented

• Client Risk: When individual clients hold too much power or represent too large a portion of revenue

These risks compound each other - a founder-dependent sales process combined with undocumented client management creates a particularly vulnerable situation.

From Risk to Resilience: A Proactive Approach

One of our clients spotted this risk early on and took action before it became a problem. Instead of staying the sole rainmaker, making all the sales, they brought in a COO and built a proper sales team. But here's what made it work: they didn't just hire people and hope for the best. 

The COO jumped in to document everything they were doing right and made sure knowledge wasn't stuck in any one person's head. Meanwhile, focus shifted from being the solo sales star to building a team that could actually close deals independently. This wasn't just delegation – it was about building something that could run smoothly without them. 

Another great move- they tied compensation directly to client retention. Account managers got bonuses based on retention milestones, and the sales team's commission structure rewarded long-term contracts over quick wins. When your team's success is tied to stable, happy clients, everyone wins – including future buyers.

What Smart Buyers Look For

Beyond the basics of clean financials and documentation, sophisticated buyers evaluate:

• Depth of management team and succession planning

• Client concentration and contract stability

• Scalability of systems and processes

• Team retention rates and knowledge distribution

Remember: An agency that runs without you is worth far more than one that depends on you. Plus has a much nicer experience to own!

Till next week,

Joey