According to Divestopedia, “A valuation gap is the difference in the actual market value of a company and the value that the owner expects to sell it for to achieve his/her needs.”
A value gap arises when a buyer bids less than the company’s estimated value or when the company’s current market value is less than the value the owner needs to sell it. The gap may result from the owner’s inflated estimate of their business’ value or a buyer who doesn’t understand the company’s current market value.
Both buyer and seller need to agree upon the company’s value to execute a successful ownership transition. Expert advice, targeted action, and data-driven negotiation may close the value gap and achieve the seller’s desired price.
How to Close Your Value Gap
Someone selling their business expects to receive the price matching the value he or she places on it. Business owners who are in a hurry to sell their companies either fail to do so or delay the sale due to the discrepancy between their estimate of the company’s value and the price a buyer is willing to pay for it. To bridge that discrepancy, begin with these three questions:
- Where does my company stand?
- Where do I want it to stand?
- How do I get it there?
Conduct a Gap Analysis
At this point, you should conduct a gap analysis to improve your products, presentations, and profitability. The gap analysis will show you where you’ve been wasting resources and energy and enable you to focus on areas that need your attention.
Gap analysis is a tool that also helps you assess performance. It can help you determine what areas your company isn’t performing at peak efficiency and why. You can work specifically on those problem areas and correct their root causes with that information. For example, if your company’s monthly expenses are more than budgeted, then examine those costs exceeding budgeted amounts. If that excess cost is electricity, how can you reduce your electricity bill? Again, work on the root problem, and you’ll find the solutions around it.
A value gap can be a huge hindrance when planning your exit. An exit, however, is equally personal and professional: if you haven’t considered the financial, logistical, legal, and emotional aspects of your exit, then you aren’t ready for it. An owner must readily accept the exit without affecting the company’s performance. Moreover, the owner must be financially secure. That retirement money must last them 20 to 30 years and be enough to pay taxes, insurance, and healthcare bills.
If the current value of your business doesn’t check the categories mentioned above, then you are not ready for an exit.
Identify Goals for Annual and Quarterly Plans
After identifying the value gap, form a long-term plan. Break down the long-term plan into short-term benchmarks to help you can assess your company’s progress and track alignment with your timeline. Shorter goals are more easily managed than long-term goals. Also, consistent achievement of short-term goals provides ongoing motivation and keeps you on track to fulfill your long-term plan.
Value Scout offers two tools, the value-correlated annual plan, and the traditional operating plan, to achieve your desired goals.
Separate Plans and Set Deadlines
Effective management skills take you where you want to go. Separating your plans and focusing on one thing at a time will help you get more work done. Most business owners ask, “How do I get started?”
Get help if you need it!
We have a solution for business owners who do not know where to begin with creating value for you. AI Recommendations by Value Scout gives users feedback on the tasks business owners should complete reaching maximum business value. The value assessment comprises a series of questions. Our analysts use your answers to calculate an accurate, current market value for your business. With AI Recommendations, business owners and their advisors get a starting point and potential value creation opportunities.
Understand Past Performance to Track Progress and Decide What to Do Next
The end goal is value creation; therefore, you must know what you worked on last quarter and which goals were achieved or missed. Working to correct value factors involves guessing the value they will add to the company. In the planning stage, you mostly guess the potential value, the time it will take to achieve, and the resources needed. Use Value Scout’s AI-assisted Value Recon to determine the estimated value of finishing a task hassle-free. Within minutes of uploading the required data, you will know the value of your initiatives and goals.
Value Recon gives business owners complete control over their value creation goals. It allows users four ways to estimate value creation:
- Revenue growth
- Gross margin improvement
- Cost reduction
With Value Recon, you can identify the most significant areas of value creation and pay more attention to the initiatives that can build value.
Finish the Work
Businesses with a pile of dispositioned items (i.e., incomplete tasks) fail to meet their own quarterly or annual goals. That imparts a company’s negative image to potential buyers and decelerates business growth. Rolled over and OBE (overcome by events) dispositions should be assigned and completed, whereas abandoned ones should be eliminated.
Value Scout’s disposition feature users can see these items sorted into multiple categories. Measure how much work is incomplete and prioritize tasks. The feature allows you to see where effort lags, so you can create a roadmap to work out a solution or eliminate the incomplete task and bridge the value gap it was creating.
Stay the Course
Diverging from your goals will create more gaps in your company’s value. The value gap is a hurdle many business owners face and cannot overcome while selling their businesses. For best results, focus early on building value.
Sadly, many business owners are unaware of their companies’ worth. This creates tension between the seller and the buyer because the buyer is not ready to purchase the business at the seller’s expected value. Overcoming the obstacles by building value will help you achieve your desired goals.
First, speak to an expert advisor to lead you to optimized productivity to overcome inefficiency. Value Scout’s experts can help you formulate an exit plan that will focus on building value. So, get a business valuation for your company and see how far you can go in the coming years.