Many owners assume the business will fund life after exit, but few ever measure whether it actually will. Most business owners spend decades building their companies and assume the business will ultimately fund their lifestyle after exit. Yet few ever stop to measure that assumption.
The critical question is whether this business will actually fund the life I want when I step away. This must be analyzed and evaluated through proper planning.
Two major variables shape the answer: the Wealth Gap and the Value Gap. Together, these gaps can influence every aspect of a successful exit.
The Wealth Gap
The Wealth Gap is personal. It represents the difference between your Wealth Goal, the amount of wealth needed to support your desired lifestyle after exit, and your current personal net worth, excluding the value of your business.
Example:
After planning with your advisory team, you determine that your total Wealth Goal is $10 million in investable assets. Your personal balance sheet today, including retirement accounts, savings, and other investments, totals $4 million. Your Wealth Gap is $6 million.
For many owners, the unspoken assumption is that “the business will make up the difference.” Making that assumption without measurement or planning can be risky to and leads directly to the second gap, and often more surprising gap. The Wealth Gap helps to measure what your business needs to be worth to financially support your life after exit.
The Value Gap
The Value Gap requires owners to look objectively at what their business is worth today and how that value compares to best-in-class peers within their industry. It represents the difference between the current value of the business and what it could be worth if it operated at a best-in-class level.
Continuing the example:
An objective opinion of value shows the business is currently worth $5 million, operating as an average performer within the industry. A best-in-class business in the same space, however, is valued at $8 million.
The Value Gap is $3 million.
This is where many owners are caught off guard. Strong revenue and solid cash flow do not automatically translate into exit value. Buyers pay for durable, transferable value, and many factors can limit value even in profitable companies. Profitability alone does not guarantee exit value.
Why the Two Gaps Matter
Identifying the Wealth Gap early allows owners to decipher what they’ll need in terms of market value from the business at time of exit. Understanding the Value Gap helps owners focus on the specific drivers that increase enterprise value, rather than relying on assumptions.
Revisiting our example, selling the business for $5 million would not generate enough proceeds to close the $6 million Wealth Gap. Without prior planning, the owner may be forced to adjust their post-exit lifestyle. With early planning, that outcome could have been avoided.
By quantifying both gaps in advance, owners can clearly define what the business needs to be worth at exit. In some cases, that means delaying a sale to allow time to build value and move closer to a best-in-class position within the industry. Clarity around both gaps gives owners control over their exit—not the other way around.
Bringing the Gaps Together
At Fragasso, we help business owners measure and bring clarity to both gaps by integrating personal financial planning, retirement plan analysis, and an objective opinion of value. When all three legs of the stool are aligned and both gaps are clearly quantified, owners gain clarity, confidence, and the ability to proactively take control of their exit.
