A Key Person Discount reflects a reduction in a business’s value due to its heavy reliance on one individual whose loss could significantly impact operations, relationships, or reputation. It is one of three business valuation discounts that are frequently applied.
What is a Key Person Discount?
A Key Person Discount reflects the reduced value of a business that depends heavily on a single individual’s skills, relationships, or reputation. As with DLOM and DLOC, the existence and magnitude of any Key Person Discount must be determined through case-specific judgment, not by mechanical reference to generic studies.
Avoid Generic Key Person Discounts
Key person risk varies significantly. Some businesses have deep management teams and transferable goodwill; others rely almost entirely on a founder’s personal involvement. Yet many valuation reports apply generic discounts without tying them to the actual business — a shortcut inconsistent with both Revenue Ruling 59-60 and sound valuation practice.
Courts have also recognized this principle. In King v. King (Florida Court of Appeal, 1997), two valuation experts offered different approaches to key person risk — one using standardized assumptions, the other grounding the analysis in specific facts. The court favored the judgment-driven, individualized method, illustrating the critical importance of case-specific analysis when assessing key person dependency.
In our valuations, where Key Person Discount is applied, it is based on business-specific facts — not boilerplate percentages or external tables.
This case-specific, judgment-driven approach is fully aligned with Revenue Ruling 59-60’s requirement that valuations reflect careful weighing of all relevant facts, not mechanical or formulaic methods.
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