The Key Person Discount accounts for a decrease in a company’s worth due to substantial dependence on a single individual, whose absence could materially affect operations, client relationships and other aspects. It’s one of the three most common types of valuation discounts.
Defining the Key Person Discount
This discount represents the diminished value of a business that is significantly reliant on one individual’s expertise, connections, or personal reputation. Like the DLOM (Discount for Lack of Marketability) and DLOC (Discount for Lack of Control), determining whether a Key Person Discount is appropriate—and how much it should be—requires a fact-specific analysis rather than a reliance on general market studies or predetermined formulas.
Why Generic Key Person Discounts Should Be Avoided
The risk tied to key personnel varies heavily. Larger companies with the likes of managers or directors for sales, production or general managers, or multiple C-suites etc, generally have much less, if any, key person discounts. It depends on heavily on management depth and size of the business.
When a business owner is selling a business, they typically always claim that all the value is transferable, but when the same business owner is getting divorced, they typically claim that no value is transferable because the business cannot survive without them. This is one of those times, where proper professionalism and independence is required by the business valuator.
Despite this, some appraisals still use blanket discounts not tailored to the specific entity—an approach that conflicts with both Revenue Ruling 59-60 and sound valuation standards.
Courts have acknowledged this nuance. In King v. King (Florida Court of Appeal, 1997), the court reviewed two valuation approaches—one based on generic assumptions, and the other firmly rooted in the business’s actual facts. The court ruled in favor of the individualized, judgment-based method, underscoring the necessity of a tailored assessment when key person dependency is at issue.
In our Texas-based valuations, any Key Person Discount applied is supported by detailed, company-specific evidence—not by standardized figures or third-party benchmarks.
Our emphasis on sounds judgment based on specific facts, aligns with the standards set by Revenue Ruling 59-60, which prohibits formulaic approaches.
