For closely-held business owners, many exit planners speak of the “value gap”. There are arguably two value gaps:
Value Gap #1
Perceived Value – Actual Value = Value Gap
Many sellers have a self-defined notion of what their business is worth. The source of this value determination may be, for example, gold course metrics – “my friend sold his shop for 2x revenues” for example; It could be driven by what the owner wants to have in order to maintain a certain lifestyle after the sale; Or it could simply be a misunderstanding in a sale contract, replacement compensation may need to be considered in determining value.
Value Gap #2
Actual Financial Needs – Realized Value = Value Gap
Remembering again that estimates of value for purposes of a sale are typically expressed as a range of value. When a sale actually occurs the net proceeds may not be sufficient to meet the financing needs of the owner.