The Value Gap Calculator
How Much Will You Need?
Many business owners are shocked to learn that they are able to extract far more from their businesses as salaries, perks, benefits, and profits than what the net proceeds from selling their businesses will produce for them during retirement. The simple truth is that many businesses need to sell for 3-6 times what they're currently worth in order to provide their owners with a similar income in retirement! The difference between the current fair market value of a business and the value it needs to be at to provide its owner with his or her desired post-sale income is called the Value Gap.
The first step in dealing with this Value Gap is in understanding how big yours is and what sort of capital will be required to meet your post-sale income goal. You can then begin working on a combination of pre-exit value creation strategies to maximize sales proceeds and pre-exit monetization strategies to harvest and leverage business value now to reach the capital you'll need for a successful transition.
The Value Gap Calculator will help you get started. Simply answer the 7 questions and you'll learn how much capital is required to fund your desired annual after-tax income after selling your business as well as the estimated increase in business value that will be necessary to reach this capital target.
Results are instantly displayed once you answer all 7 questions and you can push the "reset" button at the bottom of the calculator to change your assumptions and generate some "what if" scenarios.
Understanding Your Results
You have a Value Gap if the “Increase in Business Value Needed to Meet this Goal” is greater than 0%. What this means is that you’ll need to grow the value of your business to have enough net capital from a sale to fund your desired post-sale income for 20 years.
As a reference guide, the following annual growth rates are needed over a 10-year period to meet the following value increases:
100% Increase (2x value) 7.18%
200% Increase (3x value) 11.61%
300% Increase (4x value) 14.87%
400% Increase (5x value) 17.46%
500% Increase (6x value) 19.62%
Businesses can grow at varying rates over time, and although it’s relatively common to hit double digit growth for a year or two, most well-performing businesses average between 5% and 6% compounded annual growth over longer periods, like 10 years. In other words, it’s very, very hard to double a business’ value over 10 years because it would require a 7.17% compounded annual growth rate, which is well above what most businesses are capable of achieving over that time frame.
What’s the answer? The overall solution to achieving your income goal requires a three-pronged approach:
Rapidly increase profitability using proven tools and techniques
Monetize a portion of the business value now, diversify, and grow that asset outside of your business
Improve your business’ sellability and the transaction multiple buyers will pay for it
Organic business growth will only get you part way to your goal. But shifting the transaction multiple for your business is key. For example, if your business has free cash flow of $300,000 and its current value is $1,050,000 based on a 3.5 multiple of free cash flow, its value will increase to $1,485,000 if you can increase free cash flow to $330,000 and improve its sellability in ways that improve the likely transaction multiple to 4.5x free cash flow.
You can learn more about your Value Gap and engineering your perfect business exit by scheduling a complimentary 1-hour Exit Success Strategy Session.