The Three Value Gaps

Business owners are generally pretty reactive when it comes to selling their business. One day something happens and they decide they’re going to sell. This decision is followed by a series of events to get the company sold. However, there’s a slight problem with this method, 80 percent of companies listed for sale don’t sell and the 20 percent that do sell often have big surprises due to three value gaps.

The first gap is the Business Value Gap. This gap is essentially the difference between what a company is actually worth versus its potential worth, if the business owner were to effectively plan and improve the business ahead of time. Far too often we find that the business owner’s idea of valuation is very different than the buyer’s view.

There are loads of drivers for a company that can increase or decrease value based on their health, such as revenue, growth, market share, market size, barriers to entry, competitive differentiation, brand, margins, customer, products and services, management, quality of financials and more.

It’s best to get in touch with these drivers long before you sell and understand your valuation range long before you enter the market, otherwise you will be leaving money on the table.

The second value gap is the Personal Value Gap. Have you taken the time to take into account the cash that you have already saved, coupled with a realistic valuation of your business and the subsequent take-home sale proceeds after taxes and debts to determine if you will have a financial shortfall?

Yo do not want a massive financial surprise after you’ve sold your business, especially if your business is your livelihood.

The third value gap is the Market Monetization Gap. This value gap is all about external market factors, like the state of the economy, cost of capital, interest rates, recession, stock market fluctuations, legislative changes, industry factors and more. It’s entirely possible to be in a position where your sale transaction does not close due to any one of these external factors even though you and the buyer are eager and willing to get the deal done.

So, what’s the fix? The trick is to plan ahead.

Business owners who actually create an exit plan that is agreed upon by their team of advisors tend to be more in control. Owners choose when they want to exit and they do so on their terms and timeline and for maximum value, with the least amount of taxes while aligning personal, family and financial goals with business goals. To maximize value as well as peace of mind, the time to plan starts many years prior to your business being sold.

Don’t you think it’s time you started to lay out your exit plan?

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