What is the Value Gap?

The Value Gap helps business owners see the difference between their company’s current value and the value they need to achieve to meet their exit goals. It is the gap between today’s enterprise value and the future value needed for a significant exit.

This makes it a critical concept within the Value Acceleration Methodology™ (VAM). It also provides a Certified Exit Planning Advisor (CEPA®) with a practical way to show owners why building enterprise value matters long before an exit.

When used alongside the Wealth Gap and Profit Gap, the Value Gap helps show the full picture of readiness. Together, these gaps help owners understand not only what their business is worth now but also what it needs to become.

How the Value Gap Fits into the Value Acceleration Methodology

Before you can calculate a business’s Value Gap, you first need to find out both the current value and the best-in-class value. This process starts with a Business Attractiveness and Personal, Financial, and Business Readiness Assessment to determine how well the business is operating currently.

During the assessment, the Certified Exit Planning Advisor sits with their business-owner client and any partners they may have for separate two- to three-hour interviews to identify the strengths and weaknesses of their personal, financial, and business situations, as well as actions that could be taken to improve them.

Key management and family members may also participate in these interviews if the CEPA or business owner believes they should be included.

How to Calculate the Value Gap

To calculate the Value Gap, a business owner and their CEPA first determine the company’s current value and its best-in-class value.

The current value is calculated by multiplying the recasted Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) by the EBITDA Market Multiple that the business could command in its current state. That multiple will vary based on factors such as industry, market conditions, risk, growth potential, and the company’s overall attractiveness to a buyer.

“Your assessment scores reflect the strength of your (4 Intangible Capitals). So, if you are scoring low, it indicates you do not have the intangible strength, the know-how, and know-what needed to be able to execute your growth strategy,” Christopher Snider, Exit Planning Institute® (EPI) Chairman, writes in Walking to Destiny.

Best-in-class value reflects what the business could be worth if it improved its performance, reduced risk, and strengthened the Four Intangible Capitals – Customer, Human, Social, and Structural.

How the Value Gap Helps Drive Value

Calculating the Value Gap is the second part in a Triggering Event, which spurs owner action 70% of the time. In conjunction with the Profit Gap, it plays a key role by showing a business owner how much value can be gained from working on their business. It is also important to quantify how a business owner can increase personal wealth by building a more valuable company.

A more valuable business is more transferable and attractive to potential buyers. This can not only make a sale more likely but also help a business owner close their Wealth Gap and live out their personal plan after exiting.

After conducting a Triggering Event, a CEPA and their business-owner client can work towards closing the Value Gap – along with the Profit and Wealth Gaps – by working on the 4 Intangible Capitals.

Learn More About the Value Gap in Walking to Destiny

The Value Gap gives business owners a clearer view of the value their company must create to support a successful transition. However, it is most effective when used alongside the Profit Gap and the Wealth Gap, which link business performance to the owner’s financial needs and vision for life after exit.

To explore how these gaps fit into the broader exit planning process, purchase Walking to Destiny below and discover what it takes to prepare for a truly successful exit.