All business owners need an exit strategy. One of the reasons it is so important to have one is because the value of your business affects your future and hence understanding what your Business Value Gap is will have a huge impact on your future.
Do you have a succession plan in place? Are you resting on the idea that the eventual sale of your business will fund your retirement?
We have one question for you.
Do you know or are you making an assumption based on your own idea of what your own guess of your business is worth?
At DFK Everalls, we don’t believe in guesswork! We use our knowledge to help you build better financial outcomes.
To achieve this – we need the relevant data and true valuations. So you can base your decisions on the facts.
This starts with identifying the ‘business value gap’.
Business Value Gap
The business value gap is the difference between what your business is worth now – and the amount you need at the time of its sale in future.
What we are concerned about here is a shortfall, which could prevent you from selling. Or if you do sell, you may be facing a lesser quality lifestyle in retirement.
Once we determine this gap, we can put strategies in place, to prepare a more profitable business for sale – thereby reducing, or eliminating the gap.
We do through a Business Value Gap Analysis. It involves determining your retirement income and assets, the business value (current and future) and strategies to improve business profit and wealth.
What we are looking to do is determine:
- What your business value needs to be at time of sale
- The amount of time you need to wait, until you can afford to sell
- Your future profit target, that will provide a higher business value and desired standard of living
- Improving the “multiplier” – the capital value of your business
We have put together a case study, to demonstrate how this process works.
Business Value Gap Case Study
We recently advised a client “David” (53), owner/operator of a successful business providing professional services to the building and construction industry.
David had started thinking about retiring. He was planning to sell his business to fund part of his retirement. He didn’t realise how the shortfall in his business value affected his future lifestyle.
Based on his retirement plans, David’s Financial Adviser had estimated he would need $1.25 million in retirement assets at age 60 to fund his lifestyle in retirement.
His projected income earning retirement assets were calculated as $575,000 resulting in a shortfall of $650,000, would the value of his business cover that gap?
If David did nothing he could face:
- Accepting a lower standard of living at retirement
- Continuing working well past his desired retirement date
This case study highlights how the value of a business affects an owner’s future standard of living and how succession planning can be used to grow and realise business wealth to fund the shortfall.
Client Figures
- Value gap $650,000
- No formal succession plan
Issues
- David is the business’s key “revenue earner” with his existing staff supporting his activities
- There was a young qualified professional working in the business but he moved on to gain more experience and build his career
- David has always rejected merger talks with like businesses for fear of losing control of his business
The Solution
David’s first step was to complete a Business Value Gap analysis. This identified his value needed at sale, value gap and future profit target.
The Value Gap analysis showed he could close his Value Gap if he was able to increase his business profit ($150,000 in the first year). David was confident that with help from his advisers he would be able to achieve this.
Once David had identified his future profit target he implemented procedures to grow income and improve job profitability.
His growth strategies included purchasing a new job costing system to accurately record job income and expenses.
He also segmented his clients to focus on more profitable work and has identified some niche marketing opportunities. He has fewer clients but is making more money.
David’s succession strategy included joining a network of similar businesses to share training and professional development costs and selected administration functions.
Sharing costs and functions with similar businesses is one way of retaining control, while identifying “like minded” business owners.
They may be the future buyer of his business.
Your Path to Growth
As you can see, David was offered a two stage client services plan.
The first stage involved completing a Business Value Gap consultation. From this, David realised he needed a growth and succession plan for his business.
We then completed a Value Improvement Program which included strategies and action plans to help David close his value gap.
If you would like us to help you in the same way, get in touch.
We would love to work with you, to ensure your future success.
