What is the Value Gap?

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.

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