24 Jun What is a value gap and what causes it?
Some business owners are understandably disappointed when they learn that their business is not as valuable as they thought. They often discover this when they are trying to sell their business and they see what potential buyers are willing to pay. This is what we call a “value gap” – when the amount of money the owner needs or wants from the sale of their business won’t be reached.
There are several potential causes of value gaps. A common one has to do with expectations, that is, the owner is thinking about what he or she has put into the business (money and lots of time) versus the buyer thinking about what they can get out of it and the risk of not achieving it. The owner may also be thinking about valuation multiples from other transactions that he heard about and assumes that his company will attract the same kind of offer. This may simply be a timing issue as valuation multiples rise and fall over time.
A value gap may also arise if the buyer’s valuation doesn’t agree with the seller’s valuation, based on different assumptions and methods used to evaluate the same company. The risk to the company’s future growth and cash flow may be perceived differently by buyers and sellers and thus play a considerable role in the size of the valuation gap.
Another valuation gap may be the difference between what an owner needs for retirement and what can actually be attained from selling her business. There may also be differences between what the buyer offered, what the buyer actually pays, and what the seller ultimately gets after taxes.
Selling a business is a complex process with many financial and non-financial factors, some of which can cause value gaps. That’s why we offer value enhancement services to help address this potential problem early and often in the process.