Value Gap Analysis is part of the "Triggering Event" before passing through Gate 1 of the Value Acceleration process. CLICK HERE for more information about the Value Acceleration process.
We focus on CFME as it is the simplest method to understand and is the most common method used for valuing small businesses. The two components are:
The good news is that you can definitely control and improve EBITDA and to a certain extent you can control the multiple applied. The multiple tends to be a range of say 2-4 so you can work on your business to move it from a multiple of 2 to a 3 or a 4.
So let's have a deeper dive by way of an example.
Company A had no exit plan and decided to sell only 6 months before wanting to retire and had too little time to present the business in it's best light. It had a recast EBITDA of $100k and a multiple of 2 (the industry range was 2-4).
Company B had decided 2 years before retirement to plan for the sale of the business. By working with a Certified Exit Planning Advisor (CEPA) they increased their recast EBITDA from $100k to $120k and worked on their attractiveness so that they had a multiple of 3.
Company C has been running his business for over 5 years with the end in mind and put a comprhensive plan in place with the help of a Certified Exit Planning Advisor (CEPA) so his recast EBITDA is $130k and his multiple is 4.
Company A Value - $100,000 x 2 = $200,000
Company B Value - $120,000 x 3 = $360,000
Company C Value - $130,000 x 4 = $520,000
We stated above that the Value of a business when valued by the CFME method is based on recast EBITDA times a multiple. Through the philosophy of Value Acceleration you can move that multiple through a range (in the example above from 2 to 4). You can also improve the recast EBITDA using Value Acceleration as well. Our Value Gap Analysis software allows varies scenarios to be created and analysed:
Below is an example of our Value Gap Analysis software in action allowing a very visual analysis between where the value of the business is now and where it could be once the Value Acceleration process has been undertaken. The important thing to remember is that the Value Acceleration process takes time. Ideally up to 3 years prior to the business being listed for sale. Please note we do not do formal Business Valuations we help you make an informed Value Assessment.
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This is a MUST read book For Business Owners by a Business Owner. Walking to Destiny is not only your essential resource to understand what makes your business attractive and ready for transition; it is a business owner’s handbook to know HOW TO rapidly grow value and ultimately unlock the personal wealth trapped in your most significant financial asset: Your Business.