How to Calculate Your Three Gaps

Jun 6, 2022

How to Calculate the Three Gaps
and what to do about it

As a Certified Exit Planning Advisor (CEPA), one of the core concepts of this methodology is for business owners like yourself to understand where you are as it relates to the “3 Gaps,” Those 3 gaps being:

  1. Your Profit Gap
  2. Your Wealth Gap
  3. Your Value Gap

Each of these calculated gaps relates to either the business, personal, or the financial part of your life. There must be a balance in these three areas of the business to achieve a successful exit, whether it is 2 years or 20 years away. To understand how much further you need to go, you need to calculate these gaps.

Profit Gap

The business profit you’re sacrificing by not operating at a Best-in-Class level

The Profit Gap represents the distance between your business’s current profit (R/EBITDA) vs. the profit of a “Best In Class” (BIC) company.

So let’s say you are a chiropractor with a clinic operating at $1M in revenue and a 7.5% profit. With a little research, we determine the BIC chiropractic clinic operates at a 12.6% margin. To calculate the gap, we assume the BIC is operating at the same revenue. So, 12.6% of $1M is $126,000. The equation is then:

$126,000 – $75,000 = $51,000 = Profit Gap

Wealth Gap

The additional wealth you need to accumulate to meet your goal

The Wealth Gap represents how far you need to go to hit your wealth and retirement goals, factoring in all of your assets, including the value of your business. This is BEST calculated with your financial/wealth advisor, but the simple formula is:

Net Worth Goal – Current State Assets Value = Wealth Gap

Value Gap

The business value you’re sacrificing by not operating at a Best-in-Class level

This brings us to our final gap, the Value Gap. Non-business owners do not need to factor this in to their portfolio to understand their wealth gap and how much further they need to go, but us business owners do! This can be somewhat tricky, and should be done by a valuation expert (a service we provide at Denver Business Coach) because it takes your current state multiple and the BIC multiple and uses that to come up with your Value Gap as expressed in this formula:

(BIC/EBITDA x BIC/Multiple) – (CS/EBITDA x CS/Multiple) = Value Gap($)