The Three Gaps That Measure Exit Readiness

By Nate O’Brien 

Business owners are thinking about exit planning earlier than they once did. In the past, many waited until they were close to a transition before starting steps such as value enhancement or due diligence. Today, more owners begin the process well in advance of an exit/succession event. They know success depends not only on timing or finding the right buyer but also on whether the business can provide the financial security needed for the next stage of life. For some, that stage may be retirement. For others, it may mean starting a new venture, devoting more time to family, or engaging in philanthropy.

One way to assess readiness is by reviewing three gaps: the wealth gap, the profit gap, and the value gap. These measures show how the business is performing today and whether it is on track to support future goals. The results of the assessment will help identify areas that may need additional attention. Discovering potential issues in advance of exit activity provides the opportunity to increase value.

What Is Exit Planning?

Exit planning is the process of preparing both a business and its owner for a future transition. That transition can take many forms. Some owners sell to a third party, others hand the business down to family members, and some arrange a management buyout.

A key part of this process is understanding what the business is worth today. A valuation looks at more than revenue or profit. It looks at growth potential, industry comparisons, the customer base, the strength of the management team, and both tangible and intangible assets. By reviewing these factors, a valuation provides owners with a clear picture of the starting point and where improvements could have the greatest impact on value; however, there are gaps.

Identifying the Gaps

Business owners track plenty of numbers, but not all of them show whether the company is ready for an exit. Revenue, market share, or headcount may reflect growth, yet they do not answer the bigger question of whether the business can meet the owner’s financial needs after a transition.

The three gaps are different. They form a process that starts with the owner’s financial goals and flows into business performance and valuation. The wealth gap comes first. It defines what the owner will need from the business after exit. The profit gap then highlights how performance compares to competitors and where improvements can be made. Finally, the value gap shows whether the current business value can meet the target set by the wealth gap. Viewed together, the three gaps provide a process for evaluating readiness and identifying the steps needed to prepare for the future. With the process in mind, let’s review each of these gaps with a hypothetical client, John Doe, the sole owner of ABC, Inc.

The Wealth Gap

The wealth gap shows whether the sale of the business will generate enough to meet the owner’s personal financial goals. Put simply, it compares what the owner needs for life after exit and what the business is worth today.

Example: John Doe has $5.0 million of assets outside of the business and his primary residence. After working with a wealth advisor and exit planner, he concludes that he will need $25.0 million to retire comfortably and meet family and philanthropic goals. That leaves a wealth gap of $20.0 million. The question becomes whether the business, if sold, can provide the additional $20.0 million.

If the gap is too large, John may not achieve his goals through an exit at the current value. If the gap is smaller or closed, ABC, Inc. is more likely to fund his long-term needs. Because personal goals often shift over time, this measure should be revisited regularly.

The Profit Gap

The profit gap measures a business’s profitability and performance relative to industry leaders. It’s often measured using EBITDA, which refers to earnings before interest, taxes, depreciation, and amortization. This gives everyone a common reference point.

Example: ABC, Inc. generates $20.0 million in revenue with a 10% EBITDA margin, or $2.0 million of EBITDA. Best-in-class peers in the industry average 20% margins, which means they would generate $4.0 million of EBITDA on the same revenue. This indicates a profitability gap of $2.0 million.

A significant gap indicates that the business may not be operating at its full potential. That reduces the likelihood of a strong valuation and makes the business less attractive to buyers. A smaller gap likely means that the business will be seen as more valuable and attractive in the market. This is also one way to spot improvement opportunities before exiting the business. In this example, best-in-class peers are generating double the profit margins of ABC, Inc. That $2.0 million shortfall in EBITDA translates directly into a lower valuation when multiples are applied.

The Value Gap

The value gap is the most comprehensive of the three measures. It represents the difference between a company’s current market value and what it could be worth if it operated at peer profitability levels and commanded a stronger position within the industry’s valuation range. In short, it captures both the profitability gap and a market multiple gap.

Example: Building on the scenario above, suppose the capital markets value companies in ABC, Inc.’s sector between 4.0x and 7.0x EBITDA. At 10% margins and a 4.0x multiple, ABC, Inc. would be worth $8.0 million. At 20% margins and a 7.0x multiple, a best-in-class ABC, Inc., could be worth $28.0 million. The value gap in this case is $20.0 million.

What drives this difference? Capital markets set the overall multiple range, but where a company falls within that 4.0x–7.0x spectrum depends on how buyers perceive its risk and growth profile. Factors that tend to depress multiples include:

• Customer concentration: Reliance on one or two major accounts.
• Key-person risk: Owner or single executive controls critical relationships or knowledge.
• Lack of recurring revenue: Over-reliance on one-time projects or seasonal demand.
• Limited management depth: No leadership bench beyond the founder/owners.
• Operational inefficiencies: Weak systems, outdated processes, or unreliable financial reporting.
• Narrow market position: Limited differentiation or lack of a defensible niche.
• Weak growth visibility: Lack of pipeline, backlog, or expansion opportunities.

Conversely, businesses that diversify their customers, institutionalize knowledge, build recurring revenue, professionalize management, and steadily improve margins make a stronger case for a higher multiple.

Closing the value gap requires more than just boosting revenue. It involves addressing both profitability and risk so the business can move toward the higher end of the 4.0x–7.0x market range. This is where disciplined exit planning and professional representation create meaningful value for owners like John Doe.

Putting It All Together

Examining these measures side by side reveals why the three gaps framework is important.

• Wealth gap: John Doe’s retirement goal is $25.0 million. He already has $5.0 million of personal assets, leaving $20.0 million to come from ABC, Inc.
• Current state: At 10% margins and a 4.0x multiple, ABC, Inc. is worth about $8.0 million. Combined with John’s $5.0 million of personal assets, that puts him at $13.0 million, $12.0 million short of his retirement goal.
• Profit gap: By improving margins from 10% to 20%, EBITDA would double from $2.0 million to $4.0 million.
• Value gap: If ABC, Inc. can both improve profitability and move from a 4.0x to a 7.0x multiple, enterprise value could increase to $28.0 million. Adding John’s $5.0 million of personal assets, that would put him at $33.0 million, exceeding his retirement goal by $8.0 million.

The difference is clear: Without planning, John faces a major shortfall. With disciplined value acceleration and effective positioning in the capital markets, he could not only close the gap but also achieve financial security well beyond his target.

Strategic Considerations

Understanding the gaps is only the first step. Owners often want to know what can be done to close them. Some pursue growth initiatives to increase profitability. It’s also a common strategy to strengthen management teams, reduce customer concentration, or expand into new markets to improve value. Each strategy depends on the size of the gaps and the owner’s timeline.

This is also the stage where professional guidance matters. Advisors can help evaluate financial performance, and a valuation specialist can establish the current business value. Then, those figures can be connected to the owner’s long-term goals, creating a complete picture for exit planning.

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The wealth, profit, and value gaps give business owners a clear view of both performance and exit readiness. These measures point to whether an owner can transition now or if more work is needed to build value. If you have questions about the information outlined above or need assistance with another tax or accounting issue, KatzAbosch can help. For additional information, click here to contact us. We look forward to speaking with you soon.