Bridging the Value Gap™

Is the current market value of your business or your client’s business less than the owner’s expectations or needs?
What many companies looking to sell are experiencing is called a “value gap” or “needs gap.” This means that the company as it is performing or configured today will not achieve the sales price in the current market that it would have in 2007-8. This gap is the difference in value between then and now.

The value gap typically occurs when a company’s performance slips. A company may have had a valuation of $1,000 in 2007, based on certain performance projections for growth of revenue and cash flow. If the company has failed to meet those projections for 2008, it may now only have a valuation of $700. That difference between the previously “expected” value and the current market value is the value gap. The gap may actually widen if buyers begin to suspect (or even imagine) that the business may have additional unknown risk. It is an uncomfortable place for all parties and typically the company is taken off the market.

So what happens with a needs or value gap? Am I stuck staying with the business?
In some cases, it may not be possible for a business to grow sufficiently to add enough value to meet an owner’s needs, due to an aging industry, product obsolescence, etc. If that’s the case, however, business owners tell us they would rather know that as soon as possible so they can possibly take other steps.

However, we have been pleasantly surprised over the years at how many businesses can actually achieve their needs with a good plan and great execution. Many businesses become a “lifestyle” business over the years, supporting the income needs of the owner. As a lifestyle business, many companies are worth more to the owner than to a prospective buyer looking for a return on investment. By focusing on the primary drivers of value for the buyer, a business can be transformed into a much more valuable entity. For more information see Issues for Growth Vol. 17, No. 16 Plain Talk about Exiting Your Business in the Current Market Part 3 – The Needs Gap and the Value Gap

For more information on how The Mead Group can help your company bridge the value gap please fill out our online form.