Over the past two weeks, we’ve been talking about what the “wealth gap” is and how it affects business owners who may be looking to sell their business as part of a retirement plan. A big part of calculating the wealth gap includes determining the value of your business—both as it stands now as well as projecting what it will be worth when it comes time to sell. This is where the concept of the “business value gap” comes into play.
In a basic sense, your business value gap is the quantified dollar value of the difference between your company’s present value and the value of similar best-in-class businesses within your industry. In other words, it is a measuring stick to evaluate your business compared to your competition—more specifically, against the most successful businesses in your industry.
To calculate the value gap, you have to perform a thorough business valuation of your own company. I recommend you check out some of the following past articles on the Illumination Wealth Blog for information and insight on these calculations:
Then, you need to compare your numbers against other best-in-class companies within your space. You won’t be able to get a complete valuation of someone else’s business, but there is plenty of research you can do in order to get a good idea of what those companies are worth if they were going to sell tomorrow.
The business value gap can be calculated based on current market valuations, as well as future projections. This second calculation may be very important if your ultimate plan is to sell your business. You want to have a picture of what your business can be worth shoould you strategically enhace its value when it is time to sell. Evaluating your profitabily and business attractivees and comparing it agains competing companies will help you project a more realistic future market value. Of course, nothing is ever set in stone and the markets continually change and evolve. Calculating current and future wealth gaps and business value gaps is not a one-time exercise. It should be performed at least once a year to make sure you have up-to-date data and to keep your numbers as accurate as possible.
Why you would want to calculate the business value gap should make perfect sense. Comparing your business against similar businesses not only lets you know where you stand. It can also help you see the potential. It may make you rethink your business plan if your company doesn’t measure up to the competition from a profitability or attractiveness standpoint. Or, maybe you are looking at a successful business that has been around a lot longer than yours. You will have tangible goals to executate against as you continue to build your business up to their level.
As business advisors, we often find that many entrepreneurs have unrealistic expectations regarding the true value of their businesses. They don’t perform value gap calculations and only find out there is a significant gap when they try to sell the company that would impact their financial freedom objectives. One of the most common reasons a business does not sell is because there is little actual value due to owner dependence. Knowing your value gap and the factors thta impact it well ahead of when you want to exit can help you close the gap and experience a more profitable sale.
If you have already calculated your wealth gap in preparation for your retirement, knowing the present value gap of your business will also make a significant difference. You’ll know where the value of your business stands now and where it will need to be when you sell it to eliminate your wealth gap!
If the business value gap is in your favor—meaning your company is worth more than your competitors—that is great! You will know where you stand and you will know you are moving in the right direction. However, you can never rest on your laurels. Keep looking for ways to grow and increase your business value, so you can get the most of it when you eventually sell it. Keep running value gap calculations against year after year.
If you need help with a thorough business valuation and calculating your business value gap as you plan for a sale—whether it’s a year in the future or 20 years from now—contact Illumination Wealth today. We can help entrepreneurs like you with all your business planning needs, as well as your retirement planning goals.