SILVER TSUNAMI
TL;DR
Every buyer prices the risk that a business is dependent on one person. The name for it is the founder discount, and what nobody has is a standardized number. No federal series measures owner dependency. No industry series publishes it. The buyer rarely cuts the price openly. The discount shows up in three places: how the buyer values the business, how much of the sale price the founder has to leave in it and how much of the total payment is actually paid after closing, if at all. None of those places produces a number anyone publishes.
The standard remedy is to build a business that runs without the owner, and that has always been expensive: a management layer the business may not be able to afford, on a timeline the owner may not have. My argument in this issue is that agentic AI changes that math, if the owner properly points it at transferability instead of productivity. It is an argument, not a finding, and buyers have not started paying for it yet.
There is a moment in the sale of most small and midsize businesses when the buyer realizes the business is heavily dependent on one person. The customers call the owner’s cell phone. The pricing lives in the owner’s head. The vendor relationships were created owner to owner. The exceptions all route through one desk: the late shipment, the difficult account, the vendor who needs a phone call. Nothing is wrong with the business. It just cannot be easily handed off to anyone else.
Buyers price that dependency, and the price has a name. Ken Rutkowski in Command & Scale and Amanda David and Mark Borkowski in On-Site Magazine have both written about it this year as the founder discount, and I use the phrase in the same sense.1,2
This issue is about three things: what the discount is, why nobody can tell you how big it is, and what an owner can do about it before the sale rather than waiting for it to take a bite out of them.
What Buyers Are Actually Pricing
Strip every version of the idea down and it comes to one question. A buyer is not purchasing last year’s earnings. A buyer is purchasing next year’s, and the years after that, and the question that decides the price is whether those earnings survive the departure of the person selling them. David and Borkowski put the buyer’s question in one line: what happens if the founder is not here tomorrow.2
The cruelty of it is structural. The behaviors that successfully built the business are the same behaviors that make it hard to hand over: knowing every customer, making every call, catching every problem before anyone else sees it. The owner takes pride in them as evidence of their personal commitment. The buyer reads them as concentration risk. Both readings are correct. That is what makes it a paradox rather than a mistake.
The valuation profession has its own term for the adjacent idea, and it is older: the key person discount. It is a real line of practice with real literature behind it. It is also, as we will see, not the same thing, and the gap between the two is where this publication’s work sits.
The Basis Break
Here is the closest thing to a published measurement of founder dependency in the US lower middle market, and almost nobody reads it as one.
The International Business Brokers Association and M&A Source publish a quarterly survey of advisors who close deals below $50 million. The Q1 2026 edition, the 56th, was fielded April 1 to 16, 2026, drew 300 advisors, and covered 203 completed transactions.3 It reports a median multiple for each of five size bands. Look at what changes between the third band and the fourth.
What the Market Paid in Q1 2026 | ||||||||||||||||||||||
Under $500K (priced on SDE)
$500K – $1M (priced on SDE)
$1M – $2M (priced on SDE)
$2M – $5M (priced on EBITDA)
$5M – $50M (priced on EBITDA)
| ||||||||||||||||||||||
| Median multiple by deal size. Bars scaled to 5.0×. SDE = seller’s discretionary earnings; EBITDA = earnings before interest, taxes, depreciation and amortization. Source: IBBA and M&A Source, Market Pulse Survey, Q1 2026 (300 advisors, 203 closed transactions, fielded April 1–16, 2026). |
The multiples rise with size, which surprises nobody. The thing to look at is the earnings figure behind each multiple. Below $2 million, the market prices on seller’s discretionary earnings (SDE), a figure built by taking the company’s profit and adding the owner’s salary and perquisites back in. Above $2 million, it prices on earnings before interest, taxes, depreciation and amortization (EBITDA), which leaves management compensation as a cost of doing business.
Read that again as a statement about founder dependency, because that is what it is. Below $2 million, the convention assumes the buyer is buying a job: the new owner will step into the old owner’s role, so the owner’s pay counts as part of the return. Above $2 million, the convention assumes the buyer is buying a management team: somebody has to be paid to do the job, so the pay stays in the cost line. The market has drawn a line on its own charts at roughly $2 million and said: below this, the business is the person.
That line does not mean the discount stops at $2 million. Above it, the convention assumes a hired manager can do what the founder did. When the business still runs on the founder, that assumption fails, and the buyer prices the gap in a lower multiple, a larger rollover or a bigger earnout. The line changes where the discount shows up. It does not make it go away.
And the line is a convention, not a measurement. The survey reports one median multiple per band and does not report what each business would have fetched on the other basis. No survey does. So we can see the discount being applied on both sides of the line, and we cannot see how much of it is applied to any particular business.
Four Places the Money Actually Moves
A discount does not have to appear as a smaller number on the headline price. Most of the time it does not. It appears as structure: conditions attached to money that would otherwise be paid at closing. David and Borkowski describe the most common one: sophisticated buyers ask the founder to roll a portion of equity into the new ownership structure rather than walk away with all of it, which they frame as a way to reduce transaction risk and align incentives.2 It is both of those things. It is also the discount, denominated in time rather than dollars.
Four Places It Shows Up | |
| Where it lands in a deal | Published series measuring it |
| The valuation basis. SDE below $2M, EBITDA above it. | None. The bands are reported; the switch is never priced. |
| Rollover equity. The founder keeps skin in the deal and stays. | None for this market. No national series on rollover frequency or size below $50M. |
| Deferred consideration. Earnouts, seller notes, transition periods. | None. Terms are negotiated privately and reported only in aggregate, if at all. |
| The deal that never happens. The business closes instead of selling. | None. A closure and a sale are recorded the same way: the business is gone. |
| Rows one and four are documented below. Rows two and three are described by practitioners and are not published as series by any source I have been able to find. If one exists, reply and I will correct this in the next Silver Tsunami issue. | |
The fourth row is the one that should bother you most, and it is the only one with real numbers behind it.
Most of Them Do Not Sell At All
McKinsey’s Institute for Economic Mobility published The Great Ownership Transfer in February of this year.4 It models roughly six million US small and midsize businesses (employer firms under 500 employees) facing an ownership transition by 2035, of which more than a million are viable candidates for sale or employee ownership. Hold those two numbers next to each other. Six million face the transition. One million are viable.
The same report puts a shape on how exits actually happen. In 2022, about 510,000 US small and midsize businesses left the market. This is how they left.
How Businesses Actually Exit | ||||||||||||||||||
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| Share of US small and midsize business exits, 2022. Universe: firms under 500 employees. McKinsey estimates 6–13% of the closures could have been avoided. Source: McKinsey Institute for Economic Mobility, The Great Ownership Transfer, February 26, 2026. | ||||||||||||||||||
92% of exits are closures. 5% are sales. I want to be careful here, because this is exactly the kind of figure that gets turned into a causal claim it cannot carry: most of those closures are not failed sales. Plenty of owners close a business because it was always a job, because there was nothing to sell, because they were ready to stop. McKinsey’s own estimate is that 6 to 13% of the closures were avoidable, which is a long way from all of them.
But it sets the scale of the question. Between six million businesses facing a transition and one million viable for sale sits five million that will not be sold. Some of that gap is size. Some is industry. Some is an owner who never wanted to sell. And some of it (nobody can tell you how much) is a business that could have been sold and could not be transferred, because the thing a buyer would have been buying was a person who was leaving.
That “nobody can tell you how much” is the whole issue. It is not an information gap. It is a measurement gap, and it has been sitting there for as long as anyone has been writing about this.
The Profession’s Answer, and Why It Is Not Enough
Business appraisers have worked on the adjacent problem for decades under the name key person discount. The literature is real. Shannon Pratt’s standard reference puts the range appraisers apply at roughly 10 to 25%, and Aswath Damodaran of NYU Stern notes that appraisal practice commonly lands at 15 to 25%.5
Damodaran then takes the range apart, and his objection is the one that matters for this publication. A fixed percentage, he argues, is indefensible from first principles. The right way to value a key person is to value the company twice, once with them and once without, and take the difference. The discount should move with company size, with life-cycle stage, with whether the business runs on micro or macro drivers, and with how durable the competitive advantage is. A number that does not move with any of those is a convention wearing the clothes of a measurement.5
Two further things separate the key person discount from what the founder discount describes. The first is scope: the key person discount is applied by an appraiser to one company, on one engagement, for one purpose, and the result is not published anywhere. There is no series. Sum every key person discount applied in the United States last year and you get a number nobody has and nobody could assemble.
The second is subject. A key person discount asks what happens if this person is hit by a bus. The founder discount asks what happens when this person succeeds: sells, retires, leaves on the schedule they chose. One is an insurable accident. The other is the plan. A cohort of owners moving through their sixties and seventies is not a tail risk; it is a demographic certainty with a date on it. The appraisal literature was never built to measure a population.
The key person discount asks what happens if the owner is hit by a bus. The founder discount asks what happens when the owner succeeds in moving on.
What Fills a Vacuum
An unmeasured problem that everybody can see is a commercial opportunity, and the market has noticed. Rowan, a small-business investment bank for industrial companies, sells a prepare-then-sell model built on a diligence sweep of the areas buyers evaluate.6 Baton attacks transaction cost instead: a marketplace charging a 6% success fee against the 10 to 15% it attributes to traditional brokers.7 IQExit sells to advisors rather than owners. It is an exit-readiness platform for wealth advisory firms, commercial banks and CPA firms, built around readiness, transferability and a projected deal range.8
Each takes a different piece of the discount: the preparation, the friction, the advisor’s early warning. And every figure on their front pages is a vendor figure. Rowan says more than 80% of lower middle market businesses fail to sell and about 40% of value is lost in a sale; Baton says 70% of its own listings close. None carries a source, a universe or a date. I am reporting what these companies say about the market, not what the market is.
The Owners Are Not Ready, and They Know It
The Exit Planning Institute fields a national owner-readiness survey. The 2023 edition drew 1,162 responses from US business owners, fielded in the last quarter of that year.9 Four of its readings matter here.
58% of owners have no written formal business transition plan.
The business represents about 80% of the owner’s net worth.
49% of owners plan to exit within five years.
75% of owners plan to exit within ten years.
Three-quarters intend to be out inside ten years. Four-fifths of their net worth is inside the thing they intend to sell. And a clear majority have not written down how. That is the population the founder discount is applied to, and it is a population with no idea what its own exposure is, because no one has ever published a number they could check themselves against.
Operationalize the Founder
Everything above describes the discount from the buyer’s side of the table. Here is my view from the owner’s side, and it is a thesis, not a finding.
A disclosure, because this section is closer to home than the others: earlier this year I worked on a venture in this space. It is on hold, I have no commercial interest in any company named in this issue, and nothing below is a pitch.
The founder discount is, at bottom, a problem of where the knowledge lives. A buyer discounts what it cannot take possession of, and in a founder-run business, how decisions actually get made is the most valuable asset, and it sits in one head and walks out the door when that person leaves. You might reasonably call it “tribal knowledge.” The standard advice is to move it out: hire the general manager, write the procedures, introduce the key customers to someone else, then step back for two or three years and let the numbers prove the business runs without you.
That advice is right, and for most of the owners in the survey above it is out of reach. A management layer is a salary, and at the size where the discount bites hardest it can eat the earnings it was hired to protect. Procedures written for a binder go stale the week they are finished. And two or three years is a long time to an owner who intends to be out inside five.
This is where I think agentic AI changes the problem rather than just speeding it up. For the first time, software can do what used to take a second salary: capture how an owner decides and run that judgment as routine inside the systems the business already uses, whether or not the owner is in the building. I call this operationalizing the founder. It does not replace the founder. It makes the founder’s judgment a property of the business instead of a property of the person.
What matters most is what the AI is pointed at. Nearly everything sold to owners under the AI banner today is pointed at productivity: hours saved, tasks automated, costs trimmed. An owner who gets every Friday afternoon back and still makes every call has a more efficient business with exactly the same founder discount. The owner facing an exit should point it at the things a buyer prices: how much the business depends on the owner, how concentrated its customers are, how predictable its revenue is, and how visible its operations are to someone who has never worked there. Then judge it by one question: does the business need me less this quarter than it did last quarter?
Built that way, an AI-run operation does something to a deal that a binder of procedures cannot. When a buyer asks what happens if the founder is not here tomorrow, the owner can show a record of the business running without them, not just a promise that it will.
Hours saved do not move the multiple. A business that needs its owner less does.
I want to be as careful with my own argument as I was with the vendors’. Three things could break it.
Buyers have not priced it yet. The Market Pulse survey asked advisors whether artificial intelligence had moved valuations. 67% said no material impact; 15% said it was too early to tell; 12% saw slight upside; 3% saw slight downside.3 Until buyers credit AI-run operations at the table, this is a remedy without a price.
A system nobody can inspect is its own discount. Trade a founder nobody can interview for a system nobody can audit, and a careful buyer will discount that too. The work has to be legible to diligence, or it moves the risk instead of removing it.
Automating a mess makes a faster mess. Software inherits the owner’s habits along with the owner’s knowledge. If the way the business runs is the problem, encoding it does not fix it.
A market that is aware of a risk and has not repriced around it is a market with an unpriced risk in it. That is the shape of the founder discount today, and it is the shape of AI in small-business valuation today. It is also where the Silver Tsunami thread and the Artificial Entrepreneur thread meet: the owners on their way out and the founders on their way in are going to be using the same tools for opposite reasons.
Tell Me What It Cost
If you have closed a deal below $50 million in the last two years: what did owner dependency actually cost the seller, and where in the deal did it come out (the multiple, the rollover, the earnout, or the transition period)? And if software was doing work the owner used to do: did the buyer give the seller any credit for it? I am collecting these. Hit reply.
Show Your Work
Five things in this issue are mine rather than a source’s, and one source disagrees with another. All six are here.
“The basis break is founder dependency made structural”: my interpretation, not the survey’s finding. IBBA reports the three bands under $2M as SDE multiples and the two above as EBITDA multiples. That SDE adds owner compensation back is standard valuation practice. Reading the convention as a statement about owner dependency is my argument, and it is contestable.
“Five million that will not be sold”: derived by subtracting more than 1 million viable for sale or employee ownership from 6 million facing a transition. Both are McKinsey model outputs for employer firms under 500 employees, by 2035. They are projections, not counts. The subtraction is mine.
The exit-plan figure: two sources, two answers. The EPI report states 58% have no written formal transition plan, which makes 42% who do. McKinsey, citing the same EPI report, writes that fewer than one in three owners have a documented exit plan. I have used the primary source’s own number. I cannot reconcile the two and am not going to pretend I can.
Rowan’s 80% and 40%; Baton’s 70%: vendor claims, reported as vendor claims. Taken from each company’s own website in September 2026. Neither carries a source, a universe or a date on the page. They appear here as evidence of how the market talks about itself, and for no other purpose.
“Operationalize the founder”: my argument, not a finding. No source in this issue shows that AI-run operations raise sale prices, and the Market Pulse reading above suggests buyers have not yet credited them. It is here as a thesis to be tested.
What is not in this issue: a percentage for the founder discount itself. I have seen 20 to 40% quoted in this field, including in my own planning notes. I cannot source it, so it is not here. The 10 to 25% appraisal range above is the key person discount, which is a different measurement of a different thing.
Terms Used in This Issue
EBITDA Earnings before interest, taxes, depreciation and amortization · EPI Exit Planning Institute · IBBA International Business Brokers Association · M&A Mergers and acquisitions · SDE Seller’s discretionary earnings, a company’s profit with the owner’s compensation and personal expenses added back · SMB Small and midsize business
Reference Citations
1. Rutkowski, Ken. “The Founder Discount.” Command & Scale, June 23, 2026. commandandscale.substack.com/p/the-founder-discount
2. David, Amanda, and Mark Borkowski. “The Founder Discount: why being indispensable can cost you millions.” On-Site Magazine, August 20, 2026.
3. International Business Brokers Association and M&A Source. Market Pulse Survey, Q1 2026 (56th edition). Fielded April 1–16, 2026; 300 advisors; 203 closed transactions.
4. Yearwood, Ken, Shelley Stewart III, Nathan Marks, and Nick Noel. The Great Ownership Transfer: A New Era of Business Stewardship. McKinsey Institute for Economic Mobility, February 26, 2026.
5. Damodaran, Aswath. “Difference Makers: Key Person(s) Valuation.” Stern School of Business, New York University. Citing Shannon Pratt, Business Valuation Discounts and Premiums.
6. Rowan. Company website, retrieved September 2026. trustrowan.com
7. Baton. Company website, retrieved September 2026. baton.com
8. IQExit. Company website, retrieved September 2026. iqexit.com
9. Exit Planning Institute. 2023 National State of Owner Readiness Report. n = 1,162 US business owners, fielded Q4 2023.