KNOW YOUR VALUE GAP & ITS INTRINSIC VALUE

What is this calculation and why you need one?

What does Value Gap mean?

A value 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. Value gaps are a common reason that many mid-market transactions fail to close.

The value gap has significantly widened in the past few years given: 

  • the failure of companies to generate adequate returns to cover their real cost of capital; and

  • the increase in the expected or needed value by sellers because of the poor returns on substitute (or more traditional) investments.

Buyers and sellers often try to bridge the valuation gap during the sales process with mechanisms such as earnouts, vendor financing, and/or rolled equity structures.

In our opinion, the best way to close a value gap is to develop a deep understanding of your company's value well before the sale. This will allow enough time for the business owner to implement value creation strategies to build a company's value that meets expectations. It can also eliminate the need to structure mechanisms that reduce the amount of cash received at closing.

Know Your Value!

Intrinsic Value? What does intrinsic value mean?

Intrinsic Value is arguably the best measure of the value of your business based on its own merits rather than based on what other “comparable companies” are being sold for. It is measured by the historical and projected cash flows that have been generated or are projected to be generated by your company in the future, translated to today’s value, based on a risk-adjusted conversion factor.

Intrinsic Value is a forward-looking process designed to help you understand the future value of your company. It is most appropriate in situations where the focus is on maximizing future value. Certified valuations provide a historical viewpoint of the value of a business, but are not designed to help create future value. Certified valuations are most appropriate for situations such as estate tax returns, fairness opinions, shareholder disputes, and specialized financial reporting.

Our Value Proposition.

If you only take away one nugget of wisdom from this Calculation of Value which is intended to be used as a baseline for creating and measuring future value. Further, if you choose to engage us as your advisor through our Compass Advisory Program, you’ll then receive a customized Roadmap for Maximizing Value as your tool to achieve that future value.

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