The key to success is understanding the value gap

A Pepperdine University study reports 30% of businesses listed for sale terminate without a transaction. Why?

The recent study reports that the 3 major reasons for deal failure were:

  • Valuation gap too large (Price – Value)
  • Unreasonable seller expectation
  • Insufficient company cash flow

So, if value gap and unrealistic expectations were the primary deal killers, what really is the value of my business?

If Retirement, Exit Preparation or Succession Planning are on your mind, then knowing the range of value for your business will be important. You will notice I said “range of value”, because the business’s value is different depending on who the buyer is.

Internal Transfer or Sale

The following are at the lower range of scale and all different:

  • Family Transfer                       
  • Existing Partner / Co-Owner 
  • Internal Management            
  • Employee Buy-Out (ESOP)  
  • Liquidate Assets                     

External Transfer or Sale

The following are at the higher range of scale and all different:

  • Financial Buyer (ROI)          
  • Strategic Buyer                      
  • Initial Public Offering (IPO)

In short, your business value is a range depending on who is doing the transaction.

In working with legions of clients, the valuation is always a bit of a let-down. I have never had a client say “Oh, I’m surprised at how much it’s worth – let’s sell it”!

During the initial discovery stage when the business owner is trying to ascertain what the possible exit options are, understanding the value range is important. You don’t require a formal valuation at this point. You can obtain your range of value through a most probable sale price (MPSP) or Enterprise Value. This will put you in the time zone value-wise and allow you to make knowledgeable decisions.

When determining a value, use the low end of the range especially when making retirement planning assumptions or estimates of taxes due on sale. This will help you plan for the worst contingency, but hope for the best.

What is the Value Gap?

A term used by business Exit Planners to describe the difference of the current value of the business and the value required by the owner to achieve his post exit goals, in other words the increase that could be achieved if the value drivers are fixed.

What to do if you have a Value Gap?

  • Look for ways to reduce taxes on transfer / sale (corporate re-organization)
  • Work with an Exit Advisor to determine how to increase value (fix broken value drivers)
  • Determine which exit option will best suit you and generate the highest price
  • Consider different investment strategies for the net proceeds

How to increase the value of your business

Since your business is likely to comprise a large percentage of your total net worth, as it does for most business owners, invest prudently in your business to increase its value. There are about 25 value factors to be considered. Have your Exit Planner do an analysis of your business to determine what can be done. He or she can also help you determine the value factors to be addressed and in what order based on the associated costs, anticipated benefits, and how long before you wish to be out of the business.

Want to take a simple test to determine if you have a value gap?

Even if you have no desire to leave your business anytime soon we suggest you find out how salable your business is today and if there is a value gap. Our simple 18 question report will help you identify any gaps and the value. This is like a blood pressure check at the pharmacy; all you need is a valid email address to receive your report. Get started our our free online assessment.