In the Value Acceleration Methodology™ (VAM), a business owner's Profit Gap is the amount of money they could be leaving on the table each year by not operating as a best-in-class company.
This makes it crucial in kickstarting owner action within VAM. It also plays a key role in the toolkit of a Certified Exit Planning Advisor (CEPA®) by showing business owners why creating and driving value in their business is crucial not only for their eventual exit but also for their current bottom line.
It moves the conversation beyond what a business is currently earning and toward what it could earn with the right strategy, systems, and improvements.
Identifying a business owner’s Profit Gap is a crucial part of the Triggering Event, which leads to owner action 70% of the time.
After a CEPA determines a business owner's real numbers by recasting the financials and then benchmarks them against similar companies in the owner’s industry, the CEPA is ready to determine the Range of Value and the Profit Gap.
Those two numbers give the owner a clearer picture of where the business stands today and what may be possible with intentional value-creation work.
The formula for calculating the Profit Gap is best-in-class recasted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) minus the business’s current recasted EBITDA.
Recasted EBITDA is determined by adding back the expenses that may or may not be included in the buyer’s or new owner’s future profit and loss of the company, including discretionary expenses and one-time expenses, and subtracting takebacks from net income.
This recasted EBITDA is the best metric for calculating value because it best represents a business's earnings as an ongoing concern.
In Walking to Destiny, Christopher Snider, the Creator of the Value Acceleration Methodology and Chairman of the Exit Planning Institute® (EPI), provides real-world examples of the Profit Gap. Get your copy of Walking to Destiny using the button below.
The Profit Gap is often a wake-up call for business owners, showing the true state of their business. The Profit Gap does more than show an owner a missed revenue or earnings opportunity. It can reveal the underlying business issues preventing the company from reaching its full potential.
A large profit gap could indicate a wide range of issues within a business, from inefficient processes to an overreliance on the business owner to make sales and decisions and to foster key relationships.
The next step after calculating a business owner’s Profit Gap is to conduct a Business Attractiveness, and Personal Financial, and Business Readiness Assessment, which then leads to the calculation of the Value Gap.
After identifying these two gaps and the Wealth Gap, Value Acceleration work begins, with the owner and their advisory team creating a Prioritized Action Plan. This plan lays out a framework for improving the business in both the short term — through 90-day sprints — and the long term, with a three- to ten-year vision.
“Once you know your Profit Gap and Value Gap, you can build a business strategy to close them and reap the benefits of improved earnings and a higher business valuation, creating significantly more personal wealth in the process,” Christopher says in Walking to Destiny.
After creating the plan, the owner and advisor move into the Prepare Gate of the Value Acceleration Methodology and relentlessly execute in 90-day sprints. The work done in these sprints is strategic and aims to close the business owner’s Profit, Value, and Wealth Gaps.
Addressing the Profit Gap is only one part of the work that CEPAs do alongside business owners in the Value Acceleration Methodology. Together with the Wealth and Value Gaps, business owners can get a better understanding of why their personal goals, financial readiness, and business value must align before an exit.
The Value Acceleration Methodology™ is the strategic framework for executing exit planning, creating value for the business owner’s company while aligning their business, personal, and financial goals. The Value Acceleration Methodology guides the Certified Exit Planning Advisor and Business Owner through three gates (Discover, Prepare, and Decide) with the ultimate goal to move to advanced value creation or to exit the business.