For many business owners, saving alone won’t bridge the financial gap needed for a comfortable retirement. The concept of a “Wealth Gap” highlights the difference between your current net worth (excluding your business) and the investible assets required to sustain your lifestyle after exiting your business. This gap is often too large to close without unlocking the wealth tied up in your company.
Why Business Valuation Matters
The value of your business and a solid plan to harvest that wealth are critical. If the current value and your exit strategy fall short of closing your Wealth Gap, an integrated approach combining personal, financial, and business strategies is essential.
Step-by-Step Exercise to Calculate Your Wealth Gap
-
Estimate Your Post-Business Income: Write down the annual income you believe you’ll need to support your lifestyle after exiting your business. If unsure, make an educated guess.
-
Calculate Your Wealth Goal: Divide this income by 4% (0.04). This figure represents the investible assets needed to sustain your lifestyle without depleting your principal. For example, a $400,000 annual need divided by 4% equals $10 million.
-
Assess Your Current Net Worth: Note your net worth, excluding your business.
-
Determine Your Wealth Gap: Subtract your current net worth from your Wealth Goal. Using the example, if your net worth is $2 million, your Wealth Gap is $8 million ($10M – $2M).
Next Steps
This exercise provides a loose estimate. Your Wealth Goal depends on your post-exit aspirations and spending habits, which should be outlined in a written Personal Plan. Collaborate with a financial advisor to refine this number and develop a strategy to close the gap, potentially by enhancing your business’s value or adjusting your exit plan.