A Business Owners 3 Most Critical Gaps

Three numbers every business owner should know and manage to meet their goals.

I am not talking about the three key numbers you need to track in your business; sales, profits, and cash.
I am talking about managing your value, so that your can reach your personal goals.

These are the most critical three numbers, and a way to think about them.

What good could you do in the business with that extra flow?

Profit Gap = The Profit You’re Sacrificing by Not Operating at
a Best-in-Class Level
= Best-in-Class Profit at Your Level of Sales – Your Actual Profit
Key Points:
• For the purposes of this discussion, profit is best defined as earnings before
interest, taxes, depreciation, and amortization (EBITDA)
• To ensure an apples-to-apples analysis, your actual EBITDA should be
re-casted or adjusted for
o Extraordinary or one-time events
o Discretionary expenses that are tied to the owner
o Expenses that are currently above or below market rates such as rent,
compensation and others

How quickly would narrowing your Value Gap close your Wealth Gap?

Value Gap = The Business Value You’re Sacrificing by Not
Operating at a Best-in-Class Level
= Best-in-Class Value if at Your Level of Sales – Your Actual Business Value
Key Points:
• The basis of the Best-in-Class Value begins with the Best-in-Class Profit at
Your Level of Sales (determined in the Profit Gap analysis)
• The Best-in-Class multiple is applied to the Best-in-Class Profit
• Your actual value should be based on your actual re-casted or adjusted

How Will You Bridge the Gap?

Wealth Gap = The Additional Wealth You Need to Accumulate
to Meet Your Goal
= Your Net Worth Goal – Your Current Actual Net Worth (not including your
Key Points:
• For the purposes of this discussion, do not include the value of your business
o It is not easily converted to cash
o You may or may not convert it into cash depending on what you decide to
do with it
• As you consider your net worth goal, identify:
o What you truly need to live your life the way you would like
o What you want

The 6 D’s of Black Swan Events & Exit Planning

Normally called The 5, for Owners it is the 6 D’s of Personal Black Swan Events

Did you know that 79% of business owners have no written transition plan and 48% have done no exit
planning at all? And on top of that, roughly 50% of all business exits are involuntary and are forced
by dramatic external factors. You need to have a well-thought-out plan of what happens if something
unexpected happens to you or someone in your family, directly impacting your business.

Owners need to plan for how they want to walk away
from their business not only in a perfect scenario,
but also in a worst-case situation. Throughout
the exit planning process, it is critical to consider
the following scenarios that force owners to exit
their business hurriedly, and often leaving value
on the table. They are often referred to as the 5 D’s:

  • Death
  • Disability
  • Divorce
  • Disagreement
  • Distress
  • Disruption

We often think that a Will addresses the needs upon
the death of an owner. If your partner or spouse
passes, do you have the ability to continue their job
at the level they were performing it? If you’re put in
a position where you need to stay home to take care
of a suddenly sick or disabled family member, what
will happen if you are forced to exit your business
due to your inability to come into work?
It is important to run through the tough questions
about what you want to happen to your business
if you have to exit your business prematurely.
Statistics have shown that in the four years
following an owner’s death, sales declined 60%
on average and employment fell 17%, resulting
in a decline the overall valuation of the business.
Additionally, two years after an owner’s death, firms
are 20% more likely to fail or file for bankruptcy

It is important to have a plan in place to avoid
these issues happening to your business in your
sudden absence.
What do you want your family, clients and
management team to know? What do you want
to happen if you die or become disabled? What
should happen if you or your spouse wants a
divorce? What happens if there is a disagreement
between business partners? An unplanned exit can
not only impact the day-to-day operations of your
business, but also the tax and legal aspects of it,
along with the value of your company. You need to
create contingency plans for each of the 5 D’s to be
properly prepared for any unplanned scenario.
While each of these unplanned events will
undoubtedly be treated differently, an important
step to take is creating and communicating the
action plan for each contingency. This is done
through a contingency letter, which serves as a
playbook that is a shorthand to your operating
agreement and your estate planning documents.
Your contingency letter should outline what you,
as the owner, would like to happen if you can no
longer operate the business.
Have you planned for these contingencies? Part of
the role a CEPA. plays is to educate the business
owner on how to de-risk the business. Some of
the largest risks to the business can be planned
for and some cannot. These are events that are
usually out of your control and can ruin the value of
your business.


Imagine right now; you are in the middle of an intersection and are T-Boned. What do you want your family,
management team, and ownership team to know? What happens to your loans? Are the beneficiaries on
your assets and life insurance correct? Who should family and management talk to for advice? Do you have
a documented plan for those impacted by this event? What obligations does your business have to your
estate for the value of your shares?


Now imagine that you had a stroke and cannot talk or write. Does your family know where your important
papers are? Do you have a power of attorney for financial and medical matters? Do others have essential
passwords that enable them to pay your bills or interface with customers, vendors, etc.? Will this event
invoke a purchase of your shares? How will it be paid? Who has the right to vote your shares?


Your spouse announces that he/she has grown apart from you and now wants to end your marriage while the two
of you are still friends. How will your shares be valued in a divorce? Do you have a prenuptial agreement? How
will the changes in your finances impact the cash needs of the company? Do you know your options on how to
create a non-adversarial process to make the decisions needed to unbundle your financial affairs at the end of a
marriage and mitigate the impact on your business?


When multiple partners enter into a business, is it all roses and rainbows? They rarely prepare for conflict with a productive exit clause. Like all relationships, business partners sometimes decide not to co-own a
business. How will your interest be valued? How will it be paid?


2020 has taught all of us some painful lessons regarding business interruptions and external threats we could
never imagine. Many businesses suffered disruption to their business’s productivity and the delivery of their
products. What was the strength of your back up system? What insurances did you have to cover business
interruption? Good contingency planning includes risk reduction strategies and policies to protect against
everyday disaster situations, including data breaches, property disasters, supply chain disruption, work safety
incidents, and critical employee loss.


Time, innovation, and technology continually march on. Some business can become completely unviable overnight. Others slowly bleed to death. CEPA’s work together to create a plan that will “De-Risk” the negative impact of all these events. CEPA’s will help you assess what
you currently have in place, what you may need to do as your systems grow and change, and why this process should be reviewed

One of the best ways to protect against the 6 D’s is proactively during the Value Acceleration Process.

Behavioral Finance in the Time of COVID with Meir Statman PhD

In his Research Foundation monograph, “Behavioral Finance: The Second Generation,” author and researcher Meir Statman describes people as “normal” — neither “rational,” as assumed by standard finance, nor “irrational,” as described in the first generation of behavioral finance. In this webinar, Professor Statman will discuss the mental mistakes that investors frequently make on the way to satisfying their normal wants, especially in the context of the current global pandemic and financial crisis. The second generation of behavioral finance can help avoid errors and provide answers to important questions about saving and spending, portfolio construction, asset pricing, and market efficiency during tumultuous periods.

This is an archived recording of a live webinar that took place on 29 April 2020.

Markus Schuller: Crisis Insights for Better Investment Decisions

Crisis Insights for Better Investment Decisions

Markus Schuller with Gerry FowlerCFA


Can your investment decision support system endure a crisis? The global pandemic has strained the behavioral and choice architecture systems that investment managers use for their decisions, requiring innovative specialization through continuous improvement. This is easier said than done. To change behavioral and choice architectural routines, certain conditions need to be met. Join Markus Schuller, founder and managing partner of Panthera Solutions, for an interactive webinar to learn practical tips for creating the best conditions to improve your decision-making process.

Morgan Housel on The Psychology of Money

The Psychology of Money

Morgan Housel

Hosted  by Blair duQuesnayCFP, CFA


Even the smartest people overlook their own biases and behaviors to negatively affect their investment outcomes. And although the approach to risk is the most important topic in investing, it is not simple or intuitive. In this presentation — part of the “Wealth Management in Practice” discussion series — Morgan Housel will explore the psychology of investing, offer ways to avoid behavioral pitfalls, and provide insights about how you and your clients can think about risk in a more productive way to make better investment decisions.

Does it feel like 2021 yet?

Does it feel like 2021 yet?

The twists and turns so far make it seem like 2020 is dragging into a second season.

As an American, I’m a little shocked and worried, and I’m musing onhow political disagreements turned into excuses for violence for both sides of the red-blue spectrum.

As a father, I am concerned about the type of world my kids will have to grow up in.

As a financial professional, I know that the politics, protests, and rioting in DC are just one small factor affecting markets.

I honestly don’t know what will happen over the next few weeks, but I can help you understand how it affects you as an investor.

Why did markets surge the day the Capitol was rioted?

While the world watched the craziness in DC with popcorn, markets quietly rallied to new records the same day.1

That’s weird, right?

Well, not really.

I think it boils down to a few things.

  1. Computers and algorithms are dispassionate, executing trades based on the biases programmed in, regardless of the larger world.
  2. Markets don’t always react to short-term ugliness. Instead, they reflect expectations about economic and business growth, plus a healthy dose of investor psychology.
  3. With elections officially at an end, political uncertainty has reduced some.

Personally, I disagree with much of the implementation of the lockdowns, not protecting the vulnerable, shutting down small businesses, and how the economic stimulus bills have been approached. 
But it’s not about my viewpoint, it’s about what the whole market thinks.  I think most investors are looking past the immediate future and hoping that vaccines, increased economic stimulus, and economic growth paint a positive picture of the future. 

The Democrats control the White House and Congress. What does that mean for investors?

If you’re like a lot of people, you might think that your party in power is good for markets and your party out of power is bad.

That makes for a stressful experience every four years, right?

Fortunately, that’s not the case for our markets.  Market are pretty rational and efficient in the long term, especially with respect to politics and government policy.

While businesses and investors generally dislike increased taxes and corporate regulation, the Democrats hold such slim majorities in the House and Senate that it limits their ability to pass many big policy changes.

Also, the Democrats’ immediate agenda is very likely to be focused on fighting the pandemic and passing more stimulus aid, both of which should support stock prices.

Does that mean markets will continue to rally?

Maybe; no guarantees, unfortunately. With all the frothy market activity and rosy expectations about the future, bad news could knock stocks down a peg or two.

A correction is definitely possible, and some strategists think several sectors are in a bubble.

Bottom line, expect more volatility.

Well what comes next?

I wish I could tell you. If somebody tells you they know, then they need a dose of humility or wisdom.

I’m HOPING that the vicious cycle of divisive politics will slow down some after the inauguration, and the politicians can get something done. But, they are usually disappointing, even when it is bipartisan. 

I am optimistic that the light at the end of the tunnel is getting closer, and we can start getting a little bit closer to normal.

I’m proud of what scientists and medical professionals have been able to accomplish in such a short amount of time.

I’m grateful for the folks around me.

I’m still rationally optimistic, and hopeful about the future.  Human innovation is the ultimate resource and we are making great progress in science, medicine, technology, etc and it all makes the world a better place.  

How about you? What’s your take? I’m interested to hear your thoughts.
Email me your thoughts at Daniel@blackswancfp.com
P.S. Tax laws are likely to change under the Biden presidency. We don’t know exactly when they’ll happen or what they’ll look like, but I’ll be in touch when we know more. We will be releasing an Insights guide to the major tax changes.

1 https://www.cnbc.com/2021/01/07/stocks-rally-to-record-highs-traders-on-whats-next-for-markets.html

The Psychology of Human Misjudgment, by Charlie Munger

The Psychology of Human Misjudgment is a great speech given by the legendary Charlie Munger. He explains how behavioral psychology can be applied to life, business, and problem-solving.

Here Charlie lays out the 24 Standard Causes of Human Misjudgment, with wit and wisdom.


You can find Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger Here.

“This book is something of a publishing miracle—never advertised, yet year after year selling many thousands of copies from its Internet site.”
– Warren Buffett