Why Every M&A Deal Faces a Valuation Gap (And How to Bridge It)

Let’s be real—most M&A deals hit a valuation gap at some point. Sellers think their business is worth more than it is. Buyers want a deal that makes financial sense. And somewhere in the middle, things can get messy.

Sellers often don’t care about discounted cash flow, comps, or EBITDA multiples. They care about what they “need” to retire, or what their neighbor’s company supposedly sold for. Buyers, on the other hand, are doing the math to avoid overpaying and sinking their return on investment.

The result? Stalemates, dragged-out negotiations, and deals that never close.

Here’s how to bridge the gap without walking away or getting fleeced.

1. Show Your Math (Explain Valuation Mechanics)

Most sellers don’t think like investors. If your offer seems low, they assume you’re trying to squeeze them—not that you’re applying rational valuation methods.

Transparency is your best friend. Lay out the logic behind your offer: revenue, EBITDA, multiples, industry trends, risk factors. When sellers see the numbers instead of just a dollar figure, discussions become rational instead of emotional.

Pro tip: Add a valuation breakdown in your LOI. The clearer you are upfront, the less painful negotiations will be later.

2. Earn-Outs: Get to the Number (If the Business Performs)

Sellers want a high number? Fine—make them earn it. An earn-out ties a portion of the purchase price to future performance. If the business delivers, the seller gets their number. If not, you don’t overpay.

Earn-outs sound great in theory, but they’re tricky in practice. Disputes over revenue recognition, profit adjustments, and “who’s responsible for what” can turn toxic fast. If you go this route, get a lawyer who knows their stuff.

3. Subordinated Seller Notes: Close the Gap Without Upfront Cash

Sellers want more money? Structure it as a loan.

A seller note allows you to meet the seller’s price without writing a big check on day one. Instead, the seller finances part of the deal, and you pay them back over time. To make it more palatable, adjust the terms—higher interest, longer maturity, or deferred payments.

4. Forgivable Seller Notes: The Smarter Earn-Out Alternative

Forgivable seller notes are like earn-outs, but better. Instead of tying payouts to profit/revenue (which gets messy), you tie them to specific post-close risks.

Example: The seller says key employees will stay? Fine—structure a seller note that gets reduced if those employees leave. Seller says customers are loyal? Structure the note to decrease if revenue drops.

Key difference from earn-outs: Forgivable notes are tied to pre-existing conditions, not post-close growth.

5. Alternative Compensation: Get Creative Without Inflating Price

Not every seller wants a massive check. Sometimes, they just want financial security or a continued role.

Instead of overpaying, offer:

• A consulting agreement.

• Performance-based bonuses for bringing in new business.

• Deferred payouts structured as long-term incentives.

You’re still paying the seller, but in ways that align incentives instead of bloating the sale price.

6. Retrade: The (Sometimes) Necessary Evil

No one likes a price adjustment, but sometimes it’s unavoidable. If a seller misrepresents financials, customer retention, or liabilities, you need to adjust the deal.

The right way: Build in price-adjustment contingencies early. If sellers insist their numbers are rock solid, set terms that adjust the price if they aren’t.

The wrong way: Lowballing upfront, then grinding the price down later. That’s just bad-faith negotiating, and it kills deals.

Final Thought: Structure Smart or Pay Stupid

Valuation gaps are a fact of life in M&A. The key isn’t avoiding them—it’s structuring deals in a way that protects both sides.

If you rely on gut feelings instead of structured deal terms, you’ll either overpay or walk away from good deals. Be clear, be creative, and don’t be afraid to call bullshit when necessary.