Value Gap: how much value a business loses

The Value Gap is the difference between what a business is worth now and what it could be worth if you remove the reasons a buyer lowers the price. It is not a forecast or a promise, it is a way to see where the money is lost.

What the gap is made of

• profit and its quality: is it confirmed by documents and can it be trusted;
• owner dependency: what happens if the owner is away for two months;
• customer concentration: what share of revenue comes from one or two customers;
• recurring revenue: how much money comes under contracts rather than one-off sales;
• manageability: are the processes written down and is there a team that keeps the business running without the owner.

An illustrative example

Say the business is valued at 2.1M now and could be worth about 3.0M if the weak spots were removed. The gap is 0.9M. It is made of several parts: profit growth, lower owner dependency, more even customers, more recurring revenue. The figures are illustrative.

How to work with it

• do not try to close everything at once: pick the three factors with the biggest contribution;
• for each, set an action, a deadline and a metric that will show the result;
• re-run the valuation after 1–3 months and see whether the metric has moved.