Business Exit Planning & The Wealth Gap
1. What’s Required to Find Your Wealth Gap
2. Why You Shouldn’t Include Your Business’ Value
3. Why a Business Valuation is Still Necessary
4. What to Consider in Your Wealth Gap Plan
5. Know Your Value Gap
6. Know Your Profit Gap
7. All 3 Gaps are Interdependent
Business owners are frequently caught up in the day to day of running their business. One hundred percent of your thoughts, planning efforts, and energy are focused on what needs to happen today, in order to continue your success into tomorrow. But tomorrow is important, too. Do you plan to sell your business someday? If (and when) so, how much do you need to walk away with when it’s time to exit the business?
Enter, the Wealth Gap.
Followed by the Value Gap. And then the Profit Gap.
What is the Wealth Gap?
While it’s tempting to focus solely on the net proceeds of a business sale, you can’t accurately determine what that number needs to be without first knowing your Wealth Gap.
The Wealth Gap is the difference between your current wealth and the amount of wealth you need in order to retire and live the life that aligns with your goals after you leave the business.
Stated another way, what is the amount of additional wealth you need to accumulate in order to meet your goal? How far are you today from where you want to be when it’s time to leave?
Remember that business exit planning takes time. In order to figure out your Wealth Gap, you need to know where you are today – your starting point. You also need to know where you want to be once you exit the business – your end point.
To figure out your starting point you’ll need to add up the value of your current income-producing assets. These include investments in your:
- Retirement accounts (401ks, IRAs, etc.)
- Brokerage accounts
- Savings accounts, rental properties – all things on your net worth statement
- And one big exclusion: your business
Wealth Gap: Why Not Include Your Business?
Few businesses are easily converted into cash.
Most businesses aren’t ready and they aren’t positioned for sale.
And in reality, according to the Exit Planning Institute, 70 – 80% of businesses don’t actually sell.
Wealth Gap: 2022 “State of Owner Report” Shows Business Owners Have Work to Do
According to the 2022 State of Owner Report of Colorado, the most recent state-focused report, 48% of owners had no written personal financial plan.
A financial plan is essential to make true progress towards achieving your personal financial goals. Consider in your financial planning process:
- What goals would you like to accomplish?
- How do you plan to spend your time after you leave the business?
- How much will your lifestyle cost? (Consider things like travel, investing in another business, buying a new home, philanthropic aspirations, etc.)
- How long will you need your financial resources to last?
Work with a business advisory team or group like Oakworth’s Guided Planning Solutions (GPS) to customize a planning process to help identify where you are now, and where you need to be to reach that magic number to comfortably exit the business.
Still, Conducting a Business Valuation is Smart
Even though we don’t recommend including a business in the wealth gap equation, it’s extremely important for you to know your business’ value should you have an opportunity to monetize your exit options.
Find a partner that can help you conduct a valuation. Consider questions such as:
- Does your equipment need to be updated?
- Have your financials been audited?
- Have you developed a diversified customer base?
Generating a Business Valuation will help you sort through all the relevant questions in order to make your business more attractive to buyers down the road. Here are some of the types of valuation reports we think are valuable to a business.
The Value Gap and Profit Gap
Once you’ve uncovered your Wealth Gap, it’s time to look at your Value Gap and your Profit Gap. We won’t spend as much time on those here, but they are equally important to acknowledge and understand as you near your exit.
The Value Gap:
This is the difference between the current value of your company and the value of a competing best-in-class company within your industry.
- How much value would be left on the table if you exited the business today?
- How quickly would narrowing your Value Gap help close your Wealth Gap?
The Profit Gap:
The Profit Gap is the profit you sacrifice by not operating at a top-of-industry level. If your business were considered best-in-class, how much greater would your profits be?
The difference in that number, and your profits now is your Profit Gap.
To obtain your profit margin, you’ll need to do a little income statement accounting, too. Business owners need to understand the company’s EBITDA (earnings before interest, taxes, depreciation and amortization) in order to calculate the Profit Gap.
The 3 Gaps (Wealth, Value, Profit) are Interdependent
No one wants a gap in their business. At Oakworth we understand that your full focus remains in the business. And that’s where it should remain. As partners, we can build thoughtful strategies to assess, quantify, and influence these gaps so that you can continue creating the significant company you first set out to build.
Are you ready to identify your Wealth Gap? A financial plan and business valuation are a good place to start. We can help.
Note: This article is the second piece in a five-part series on Business Exit Planning.
- Our first blog discussed the “6 Essential Steps Toward Successful Business Exit Planning.”
- In our next installment on business exit planning, we’ll be discussing building your winning business exit advisory team.
Again, if you’re interested in learning more about business exit planning, join our live webinar coming up in April!
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This document is being provided for informational and educational purposes and is not meant to be taken as specific advice. Oakworth Capital Bank does not provide tax or legal advice. All decisions regarding the tax and/or legal implications of these strategies should be discussed with your tax and/or legal advisors before being implemented.