How to Bridge the M&A Valuation Gap: 9 Proven Strategies to Close the Deal

The mergers and acquisitions (M&A) process can be a bumpy road for both the buyer and the seller of a business, and the valuation gap—the difference between the price a buyer is willing to pay and the price a seller expects to receive—is one of the most common obstacles to closing a deal. Until you bridge that gap, you could face stalled negotiations or worse: a deal that is never finalized.

By exploring the reasons behind a valuation gap and identifying thoughtful strategies to narrow the divide, however, you can ensure the deal gets done and both sides come away satisfied. Read on to learn how you can close the gap—and the deal.

Why Do M&A Valuation Gaps Happen?

Buyers and sellers sometimes have differing opinions on the value of the business being acquired: If you’re the buyer, you typically want to pay the lowest possible price. If you’re the seller, you’re usually focused on maximizing that price. Both are valid perspectives, but the conflict between them creates a valuation gap.

Several factors may contribute to a wide disparity in perspectives on price:

• Differing valuation methods

  Buyers and sellers may use different approaches to value a business. For example, you can derive the valuation from company-specific projections such as a discounted cash flow (DCF), but varying opinions on growth rates, margin profiles, and discount rates could materially impact each party’s valuation. Or you could take a market approach that evaluates comparable companies or transactions, but buyers and sellers may not agree on the same universe or may prefer to peg the valuation to different players in the valuation range. Beyond valuation methodologies, intangible factors like brand reputation and customer loyalty are hard to measure, which can also impact value.

• Risk perception

  Buyers often approach acquisitions with a more risk-averse mindset compared with sellers, who generally adopt a more bullish sentiment related to the stability and predictability of the business. Naturally, your point of view on risk will impact your perception of the company’s value—and the same goes for the other party.

• Market conditions

  If you and the other party disagree in your assessment of the overall economic environment, sector-specific trends, and the competitive landscape, it can be tough to find common ground in determining fair value.

• Emotional factor

  If you’re selling a business that you’ve built over many years, you may feel a deep emotional connection to the company, which can impair your ability to value it objectively. As the buyer, you may not share the same view.

9 Ways to Bridge the M&A Valuation Gap and Close the Deal

Successfully bridging the valuation gap requires a blend of negotiation, creativity, and flexibility. Here are nine common strategies you can use to close the gap and keep the deal on track.

1. Set Clear Valuation Metrics from the Start

   Start by ensuring both parties to the transaction are using the same financial metrics and assumptions to value the business. Find out where you agree on forecasts, growth assumptions, and risk factors. By aligning on the key value drivers, both buyers and sellers can develop a mutual understanding of the business’s potential.

2. Leverage a Competitive M&A Process to Maximize Value

When multiple potential buyers are competing for the business, the seller gains a clearer sense of what the market is willing to pay for the company. Furthermore, the presence of competition can drive buyers to improve their offer, which creates leverage for the seller in negotiations. That’s why one of the most effective ways to bridge a valuation gap is to run a competitive auction: Sellers are more likely to achieve a price closer to their expectations, and buyers are encouraged to structure more favorable terms to secure the deal, potentially mitigating the gap through earnouts, rollover equity, or other mechanisms.

If you are the buyer in this transaction, take note: Participating in a competitive process provides visibility into how other players are valuing the business, which can help sharpen your own valuation and ensure you do not overpay. Although you may need to assume a more aggressive stance, you’ll also have an opportunity to identify areas where synergies could be maximized—and adjust the price to reflect those synergies.

3. Beyond Price: Key Deal Terms That Can Bridge the Gap

Price is not always the most important factor in a transaction. Can you negotiate other terms within the purchase agreement to create value for both parties? For instance, as a buyer, you may be willing to pay a higher price if the seller agrees to remain involved in the business post-acquisition or to continue operating in some capacity. And as a seller, you might value other considerations such as job security for key employees, brand preservation, or a smooth transition process.

4. Creative Deal Structures That Benefit Both Buyer & Seller

Deal structure flexibility can play a significant role in bridging the valuation gap. If you’re a buyer proposing a higher upfront price, balance it with a deferred payment structure or with an eye toward maximizing tax advantages for both you and the seller. Creative structuring often makes a deal more palatable to both sides, even if the final purchase price is not exactly what either party originally envisioned.

5. Rollover Equity: A Win-Win Strategy in M&A Deals

A rollover equity strategy—where the seller retains a portion of the business after the sale, usually in the form of equity in the acquiring company—can be an effective way to bridge a valuation gap by aligning the post-acquisition interests of both parties. By rolling over some of the proceeds into the new company, the seller effectively shares in the future upside and growth of the business, which may justify a higher price upfront. The buyer benefits from having a committed seller who remains invested in the company’s success, which can ensure a smoother integration and ongoing strategic alignment.

Rollover strategies are also used in many private equity transactions, where the investor may offer the seller the option to maintain an ownership stake in the new entity, creating a sense of partnership and shared financial risk.

6. Earnouts: How Performance-Based Payments Can Bridge the Gap

With an earnout structure, part of the purchase price is contingent on the business meeting certain performance milestones following the acquisition. This approach can help bridge the valuation gap by allowing the seller to realize a higher price if the company performs well after the deal closes, while also mitigating the buyer’s risk if the business doesn’t meet expectations.

7. Seller Financing: A Smart Way to Close the Deal

In a seller financing arrangement, the seller agrees to finance a portion of the purchase price by providing the buyer with a loan to be repaid over time, with interest, often secured by the acquired business’s assets. This type of arrangement may be preferable to a loan from a third party, which will have a higher-priority lien on the assets than the seller note.

If you’re the seller, you can achieve a higher valuation by receiving more money upfront or in the form of future payments. If you’re the buyer, you’ll enjoy fewer upfront cash requirements and a potentially easier process for financing the deal, while also signaling to the seller (by assuming some of the risk) that you are truly committed to the success of the business.

Seller financing can be a particularly attractive strategy where the buyer may be unable to fully secure traditional financing or is looking to optimize their capital structure.

8. How Intellectual Property Can Boost Deal Valuations

Does the target business have valuable intellectual property (IP)? If so, negotiating a deal structure that focuses on the value of the IP itself can help bridge the valuation gap. If you’re the buyer, you might be willing to pay a premium for IP that can unlock new revenue streams or be used in innovative ways. If you’re the seller, you could seek an agreement where you retain ownership of key patents, trademarks, or licenses and then lease them to the buyer; this allows the seller to maintain some value from the business even after the sale and enables the buyer to access the IP without paying full value for it in the transaction.

An IP-focused strategy can also be a way to compensate the seller for undervalued assets that are difficult to quantify, such as brand value or proprietary technology.

9. Timing Matters: When to Delay or Structure Staggered Payments

Sometimes, the valuation gap is a result of differing views on the deal’s timing. If market conditions or the business’s performance goals are expected to improve, buyer and seller may agree to a delayed closing or staggered payments. This allows the business to achieve certain business objectives or market milestones before the transaction is completed. As the buyer, for example, you may agree to a lower purchase price initially with the remaining payments due later, contingent on the company hitting agreed-upon performance metrics. As the seller in this scenario, you forgo the risk while gaining the opportunity to realize the desired value over time if the business performs as expected.

Bridge the Valuation Gap & Close Your M&A Deal Successfully

The valuation gap may be a common challenge in M&A transactions, but it is far from insurmountable. By recognizing the underlying causes of the gap and employing appropriate strategies for addressing them, buyers and sellers can work together to find common ground and close the deal. Why not run a competitive process? Use rollover strategies or seller financing? Build a creative deal structure? These and other flexible approaches can all be key in achieving your ultimate goal: to create a transaction that delivers value for both parties, ensuring a smooth and successful acquisition.

Need expert guidance to navigate your deal? PCE’s experienced M&A advisors specialize in structuring deals that work for both buyers and sellers. 

Anthony Galvan
Anthony Galvan is an Associate at PCE, supporting clients in buy-side and sell-side M&A, recapitalizations, and strategic advisory. With experience in financial modeling and transaction analysis, he helps business owners make informed decisions that align with their long-term goals.

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