Value Gap: What Is It and How to Close It?

If you were to sell your business tomorrow, do you know how much you could get out of it? Knowing your company’s value is always a good place to start, whether you plan to sell your business soon or much later. Business owners are never immune to an unforeseen event—or an opportunity—that could lead to selling their businesses at short notice.

Every business owner wants the best price for all those years of hard work and struggle. You have also grown your business and expect it to give you the best value upon selling it; however, buyers might not be on the same page. You will need to justify your business’ value to them.

Sticking to company goals without changing its internal operating conditions to meet these new goals indicates insufficient or flawed business planning. Also, it is impossible to plan out a strategy without considering the discrepancy between the company’s current value and projected future value after achieving strategic goals. The value gap analysis makes it possible to determine the gap between the planning phase (before implementing strategies) and the desired outcome. However, it is only helpful if corrective action or improvement measures are taken or decided by a new strategic direction.

What Is the Value Gap?

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.”

It is natural for entrepreneurs to overestimate the real-world value of their businesses. This may result in devastation for owners who get an unpleasant surprise when marketing the business for sale. It is common to observe a significant difference between the price offered by the buyer and the one the owner expects. However, after several stages of negotiation have led you to evaluate and correct your business plan with the help of experts, you will be able to get the desired value.

Recommended Value Drivers

If you are contemplating selling your company, there are some value-driving factors that we recommend investigating.

It is possible to identify weak points in your strategic planning early to avoid a value gap situation. You then have the opportunity to take corrective action that will safeguard the business against the risk of failure or lower business value. By using a remediation strategy or modifying the company’s work processes, you can protect its value.

If a value gap analysis is not accompanied by an assessment or additional measures to rectify identified issues, it will not affect business value. The sole purpose of a value gap analysis is to present the current situation and indicate whether the company’s objectives are realistic. Positive change can only be brought about by creating additional strategies based on an informed interpretation of results.

How to Close the Value Gap

To reduce the value gap, it is crucial to revise your business strategy and adapt it to the company’s means or improve the standards of company operation (e.g., by hiring new employees or acquiring machinery, thereby making processes and operations more efficient). Each company has different areas that need improvement, so we recommend that you work with an experienced advisor to find where the business excels and where it needs improvement.

Once you identify those, the advisor will help you implement a few corrective measures to strengthen or eliminate the weaker aspects of your business. After processes have been revised, business value should increase dramatically.

The increase in value does not only result in financial results. It also relates to how a company adapts its strategy according to the economic evolutions that impact its activity. Having an idea of your business’s value (actual or potential) is a handy, strategic tool leading to targeted actions that can be activated for sustained business optimization.

Value Gap Analysis: Identify Action Items

Various reasons cause a value gap. You can address them by:

Building Management Structures

A functional, multi-person organization reduces dependency on the business owner. In addition, distributing responsibility to various people ensures the future viability and transferability of your company.

Therefore, clearly define job and reporting responsibilities in an organizational chart and delegate as much as possible. Nobody wants to buy a company that cannot survive and function without its current owner. Reducing owner dependency sustainably is probably the most significant single lever for increasing your company’s value!

Establish a rolling weekly, monthly, or quarterly report in addition to the common business analysis. This is not about countless vital figures or creating a “cemetery of numbers,” but rather evidence that you can present your company as a controllable and measurable business system. The increased transparency reduces the buyer risk and automatically increases your company’s value!

Pass on Knowledge to Management Staff

You have a comprehensive knowledge of the business: manufacturing techniques, production secrets, customers, suppliers, employees, etc. In short, you know everything, and the company depends on you.

Consequently, the company’s survival may depend on you, too—or an unforeseen departure may severely impact its operation. One element that gives value to the company is an autonomous management team that is efficient, trained, and proactive. Invest in training your crucial management staff by focusing on their overall development. Periodic training is also the smartest way to stay ahead of competitors. You can implement the most advanced systems and processes in your business because you have a team capable of handling them.

Are you wondering if your company is autonomous? If so, just ask yourself whether you can leave it for six weeks without worry.

Standardize and Document Processes

Focus on optimizing processes and documenting these new initiatives. Document the new processes, IT initiatives, and operating systems that your business relies on, as well as the policies that guide its corporate structure, sales, and marketing. Greater transparency and a professional presentation and description of your company as a functional system with a few dependencies, plus a sustainable structure, always lead to higher company value.

Document all essential business processes. Create clarity and transparency for internal operations, as these emphasize the quality and the “system character” of your company.

Optimize the Financial Structure

The financial structure naturally attracts the attention of the accountant, the banker, the tax specialist, and the legal advisor when you take your business to market. An optimal financial structure optimizes profitability.

A potential buyer who judges that working capital is insufficient will demand the seller inject a sum of money into the business or, failing that, reduce the offered price. Analysis of the company’s financial situation may also reveal unidentified assets, such as development research credits.

Complete and thorough documentation of all critical information for managing director activities (overview of customer inquiries, financial data, open and current contracts, inventory overview, monthly marketing expenses, etc.) will help you get a higher value.

Where to Start?

The company’s profitability influences its price. Focusing on improving profitability and bringing in experts usually results in the best value. Selling a business is a process that can easily take six months to two years. When it comes to selling to related parties (family or employees), expect a process of two to five years—sometimes more. Transaction terms impact the sale price. A sale price balance can make it easier to sell or get a better price.

Finally, remember that selling your business can be emotionally charged. Many transactions fail because the parties involved do not understand each other. The help of professionals dramatically facilitates the negotiation and helps ensure a smooth transition.

How Quantive Can Help

To sell your business for the right price, you need to understand the factors that drive value. A valuation can help you get started. Get help from professionals (like our accredited valuation team) who will provide you with a valuation and value gap analysis.

Your valuation analyst can work with you to understand:

• What factors or risks are present in the company holding value down?
• What actions might the company take to improve value?
• Are there risk mitigation steps that the company might take to improve value?
• What will the impact of improved earnings have on value?

Since 2003, Quantive has performed over 3,000 business valuations. Contact our valuation specialists for a no-cost consultation today.