Glossary
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Key Person Discount
« Back to Glossary IndexMost privately held businesses are dependent on an individual whose continuous involvement in the business generate incremental value. The attributes of a key person include strong relationship with customers, relationships with suppliers, standing and reputation in the industry, knowledge and expertise, leadership and extraordinary management capacity, etc. Key Person Discount is the amount of deduction from the value of shareholding interest to reflect the fact that a key person is unlikely to be continuously involved in the business which will potentially result in lower earnings. Business valuators generally apply key person discount when the analytical procedures indicate that a key individual whose absence in the future operational and financial would impact the company’s long-term viability. One of the analytical procedures for estimating the value of the key person discount is to deduct the present value of expected cash flows without the key person from the present value of expected cash flows with the key person.
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