The Most Important Number for a Business Owner Considering a Sale
Company owners hoping to sell and stop working won't know whether an offer on their business is good enough unless they know their 'wealth gap.'
Editor’s note: This is the first article in a two-part series. The second article will explain how business owners can work out their wealth gap in five minutes.
In 2016, we had a client very close to signing a letter of intent to sell their business for $6 million. It seems like a big number, but what was obvious to us, as their financial planner, was that it wasn’t enough. I’m not saying it wasn’t a fair offer. But after taxes and repaying the investment bank, it wasn’t enough money to replace their income and pay for their lifestyle.
There are a lot of important numbers when it comes to selling your business. Perhaps the biggest driver of valuation is growth, but this is something different. What I’m talking about is the number that you need to know, to know you won’t run out of money beyond the sale. This is the “wealth gap.”
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The wealth gap and your retirement
The wealth gap is the difference between your current assets and the amount you would need to support your lifestyle. For a business owner, it’s what you need to get from selling your business. We were advising a couple who needed about $25,000 a month, or $300,000 a year, to support their lifestyle.
As their planner, we knew they needed about $9.5 million in gross (pre-tax) liquid assets to support this number. They had about $1 million saved in their 401(k)s. Therefore, they needed to get $8.5 million from the sale of their business if they planned to stop working beyond the transition period, which they did. That $8.5 million is the wealth gap.
We relied on financial planning to come to the total number they needed to fund their lifestyle. That allowed us to factor in things like taxes, future income from Social Security and historic market volatility. You can access a free version of the planning tool we use.
In the next article in this series, I’ll cover a back-of-the-envelope way to calculate your wealth gap.
Closing the gap
One major challenge in all of this is that it’s very tough to know what your business will sell for. As the owner of a wealth management business, I can look at the industry and see the biggest five to 10 companies that also serve my client niche and figure that one of them will buy me.
According to Woodbridge International, an investment bank for small to midsize businesses, of the 25 businesses they sold in 2024, 23 did not know the buyer prior to the transaction. This is the importance of having a good investment bank. Sometimes the wealth gap can be closed just by finding the right buyer.
The other end of the spectrum can be more obvious: Those who are not close. Once again, I’ll use myself as an example.
I was a partner at a wealth management firm that sold. I now own my firm, Exit 59 Advisory. Even with the previous sale, my business is not worth my wealth gap. Add to that, I have a 6-year-old, a 2-year-old and possibly a newborn by the time this is published. My runway is long. For people in my situation, the wealth gap is not all that helpful. You need to focus on a different metric: the value gap.
I’d like to take credit for what happened next to the client who backed out of their initial sale, but the reality was that they did the hard work to close the gap. In the next four years, they drove down client acquisition cost by introducing other marketing channels, increasing revenue through those same channels and increasing margins through the use of technology.
In 2024, they sold the business for about 10 times that initial offer. Sometimes it’s finding the right buyer. Sometimes it’s driving up the value of the business. Often, it’s both.
In this case, they way overshot their wealth gap. They much preferred that to the stress of cutting it close.
Related Content
- How to Sell Your Business With No Regrets
- The Four Worst Mistakes to Make When Selling Your Business
- Why Your Business Shouldn’t Be Your Only Retirement Plan
- Three Tips for Selling Your Business and Getting the Most Value
- For Business Owners, Estate and Exit Planning Join Forces
-
Why Public Markets Don't Look Like They Used To -
Turning 65 in 2026? Here Is Exactly How to Sign Up for MedicareWhether you’re months away from your 65th birthday or plan to work past retirement age, here are the steps to secure your Medicare coverage and avoid costly mistakes.
-
A Free Tax Filing Option Has Disappeared for 2026: Here's What That Means for YouTax Filing Tax season officially opens on January 26. But you'll have one less way to submit your tax return for free. Here's what you need to know.
-
Turning 65 in 2026? Here Is Exactly How to Sign Up for Medicare
Whether you’re months away from your 65th birthday or plan to work past retirement age, here are the steps to secure your Medicare coverage and avoid costly mistakes.
-
I'm 61 and Want a Divorce, but I Worry About My Finances. Should We Live Separately but Stay Married?We asked Certified Divorce Financial Analysts for advice.
-
What's in Store for the Stock Market in 2026?Wall Street expects the bull market to keep running in the year ahead.
-
Is a Caregiving Strategy — for Yourself and Others — Missing From Your Retirement Plan?Millions of people over 65 care for grandkids, adult kids or aging parents and will also need care themselves. Building a caregiving strategy is crucial.
-
6 Financially Savvy Power Moves for Women in 2026 (Prepare to Be in Charge!)Don't let the day-to-day get in the way of long-term financial planning. Here's how to get organized — including a reminder to dream big about your future.
-
Private Equity Is Fundamentally Changing: What Now for Investors and Business Owners?For 40 years, private equity enjoyed extraordinary returns thanks to falling rates and abundant credit. That's changed. What should PE firms and clients do now?
-
Stocks See First Back-to-Back Losses of 2026: Stock Market TodayRising geopolitical worries and a continued sell off in financial stocks kept pressure on the main indexes on Wednesday.
-
How to Use Your Health Savings Account in RetirementStrategic saving and investing of HSA funds during your working years can unlock the full potential of these accounts to cover healthcare costs and more in retirement.
