In the last series of articles, we discussed the purpose and process of establishing the various types of exit goals owners seek. The next two articles describe the next phase of the Exit Planning Process: Determining whether a gap exists between the resources owners have today and the resources owners will need to achieve their goals. We call that determination a Gap Analysis, and it has two important functions:
- The Gap Analysis establishes an owner’s starting and end points, enabling Exit Planning Advisors to chart a path between the two.
- The Gap Analysis prompts most owners to undertake the planning necessary to go from where they are today to where they want to be when they exit their companies.
Let’s assume that a business owner, Maribel, has a financial independence goal that requires investment capital of $5 million upon her exit. If Maribel’s available resources (including the net proceeds from the transfer of the business) total $3 million, her financial gap is $2 million. The next phase of planning will involve creating and implementing a series of recommendations to close that gap by the exit date Maribel selects.
BEI Exit Planning Advisors begin the gap discussion by asking owners several questions:
- Is the financial security goal you set accurate or unrealistically low?
- Have you quantified the resources currently available (both business and personal) to attain your financial security goal?
- Is there a shortfall (or Asset Gap) between the resources you have and those you’ll need to achieve your financial security goal?
- If so, how great is the Asset Gap between the value of your current resources and the resources you will need?
- What must you do to bridge your Asset Gap?
These questions (and more) are all part of a Gap Analysis.
Gap Analysis Benefits
While the Gap Analysis serves two critical functions (establishing the start and end points of an owner’s journey, and providing the motivation many owners need to plan a route between those points), it has several other benefits.
- Determining the size of the gap that owners must fill before they can exit successfully allows owners and their Exit Planning Advisors to efficiently develop and execute strategies to close it.
- Learning that they likely face a greater financial shortfall than they anticipate motivates most owners to increase business value and cash flow sooner and more forcefully than does remaining blissfully unaware of the work they need to do. This means that Exit Planning Advisors can appropriately approach owners about beginning their Exit Plans today, and vice versa.
- Conversely, learning that there is little or no gap between where they are and where they want to be enables owners to turn their attention to important Exit Planning endeavors, such as deciding whether they want a vacation home on the beach or in the mountains.
- The Gap Analysis gives owners a new and more realistic understanding of how much time, capital, and effort it will take to get from where they are to where they want and need to be.
Misperceptions About the Gap
In our experience, few business owners understand the need for a Gap Analysis or what a Gap Analysis involves. Compounding that problem is that few advisors have considered the importance of first understanding and then helping their owner-clients analyze any gap. Doing so would seem to be a simple task, a straightforward undertaking. It typically is, except for one small detail: Owners, and all too often their advisors, operate under a host of misperceptions. These misperceptions prevent most owners from successfully exiting their businesses.
Exit Planning Advisors can play a vital role in unmasking these misperceptions and eliminating them. We’ll describe the most common misperceptions and the role advisors play in eliminating them in our next article.