In M&A, a valuation gap is simply the difference between what a buyer believes a company is worth…and what they’ll pay…and what a seller is willing to accept. The reality is that nearly every mid-market deal will experience a valuation gap, by some measure and in some aspect of the transaction, before it either crosses the finish line or falls apart. Valuation gaps are commonplace, and buyers, sellers, and M&A advisors need to anticipate their existence and decide in advance what they’re willing to do to bridge them. If I were to receive a pair of Christian Louboutin’s every time I’ve had to navigate a valuation gap, I would have a very large closet full of them by now!

The data confirms how pervasive they are. PwC’s 2026 Global M&A outlook identified persistent valuation gaps as one of the primary constraints weighing on mid-market dealmaking, even as overall global deal values rose 36% between 2024 and 2025. The gap between what buyers will pay and what sellers will accept is not an anomaly…it is a structural component of every deal cycle, particularly in the middle market. Baird’s investment banking research noted that many sellers continue to anchor on valuations seen near the peak of the M&A cycle, while a significant subset of buyers have adopted a risk-off posture amid sustained macroeconomic uncertainty…this combination of high sellers expectations and high buyer risk expectations creates a combination that creates persistent valuation friction even when both parties want to transact.

Although valuation gaps may sound alarming, they are more technical and psychological than most people in the room give them credit for. They are generally traversed through non-cash transaction structures, contingent or otherwise, such as vendor take-back notes, equity rollovers, earnouts, and holdbacks. These mechanisms spread risk for the buyer while allowing the seller to capture the transaction value they need. However, the notion of a valuation gap is far more nuanced than the mechanics alone suggest or what most people in the world of M&A like to dive into it.

Here is what buyers, sellers, and M&A advisors need to understand when a valuation gap appears.

For the buyer an M&A deal is a business decision, for the founder who is exiting; it is a life decision.

This is an imperative that most buyers fail to recognize before the valuation gap emerges. The mid-market M&A process is not being viewed from the same lens as the realities of the outcome from the M&A transaction, for both the buyer and the seller, are markedly different.

This understanding for buyer’s is quintessential in their ability to navigate the emotional and psychological realities that accompany valuation gaps for sellers.

Know what you’re actually optimizing for.

Founders need to be clear on their objectives and prioritize what genuinely matters to them. Strong exits require give and take from both sides. Sellers who understand their priorities intimately know where to hold firm and where to flex. We recently closed a significant transaction where the seller was completely unwavering on total transaction value…there was no movement on that number, full stop. But there was flexibility on structure. We bridged the gap through an equity rollover and a holdback, which gave our buyer client greater confidence in the deal and ensured the seller had meaningful skin in the game post-close. Understanding the distinction between price and value as well as between value and structure… is what made that deal possible.

The psychology of the gap is where deals actually die.

To a seller, a valuation gap rarely lands as a neutral data point. Instead it often lands as an insult. It triggers a cascade of emotional and cognitive responses that have very little to do with spreadsheets and a great deal to do with identity, legacy, and self-worth. The seller has built something…often over decades…and has assigned it a number that represents more than enterprise value. It represents proof of what they created. When a buyer comes in below that number, what the seller hears is not “we see the business differently” …what they hear is “what you built isn’t as good / what you think it is.”

This is psychological dissonance in its most acute form. The seller holds a deeply internalized belief that their business is worth X. They are now being told it is worth Y. The gap between those two numbers becomes more than just a financial mismatch.  And how buyers, M&A advisors, and sellers manage that dissonance is often the precise difference between a deal closing and a deal collapsing.

Compounding this is what behavioral economists call anchoring, which is one of the most well-documented cognitive biases in decision-making. In M&A specifically, when the first offer is tabled, it creates an anchoring value that shapes all subsequent perceptions of worth, even if that number was lowballed from the outset. Sellers who have informally valued their business (often at a peak-cycle number)…perhaps based on a multiple they heard at a conference, or a comparable deal from 2021…are anchored to that figure whether they realize it or not. Every subsequent offer is measured against that anchor, not against market reality. Research by Tversky and Kahneman established that anchoring is among the most robust phenomena in judgment and decision-making whereby people consistently interpret new information through the lens of an initial reference point rather than evaluating it independently. In practice, this means that a seller anchored to an inflated number isn’t being irrational in their own mind; instead they are being entirely predictable. The M&A advisor’s job is to understand that dynamic and work within it, not against it.

Buyers and advisors need to deploy bridging structures with care. A vendor note or an earnout presented as a take-it-or-leave-it mandate tends to deepen the dissonance rather than resolve it. It signals that the buyer sees the gap as the seller’s problem to absorb. The best buyers do the opposite: they bring the seller into the solution. They frame the structure as a shared bet on the future value they both believe is there because if the seller genuinely believes in the number, a well-structured earnout shouldn’t frighten them. It’s an invitation to prove it. When a seller is part of building the bridge rather than being handed a blueprint for it, the psychological shift is significant. The gap stops feeling like a judgment and starts feeling like a mechanism.

Earnouts are powerful and frequently misused.

Earnouts have become one of the most common bridging tools in the mid-market, and their usage has grown sharply as gaps have widened (I wrote about this last week). According to SRS Acquiom, the use of earnouts increased by approximately 62% in 2023, with the portion of purchase price captured in earnouts hitting an all-time high of 40%. But their prevalence obscures a more complicated reality. According to the 2024 SRS Acquiom M&A Claims Insights Report, earnouts pay out just 21 cents on the dollar on average…meaning sellers receive roughly one-fifth of the contingent consideration they negotiated. Delaware courts have seen a steady rise in earnout litigation, with disputes centering on whether buyers met their obligations to operate the business in good faith during the measurement period.

The lesson isn’t that earnouts are bad instruments. It’s that they are precision instruments being deployed with blunt-force execution. Maximum earnout periods of two to three years are generally advisable, and sellers must ensure they have information and control rights to prevent buyers from influencing the metrics being used to measure performance. Earnout metric selection matters enormously as revenue-based targets are cleaner and harder to manipulate than EBITDA-based ones, which are subject to accounting treatment decisions made entirely by the buyer post-close.

Information asymmetry is a root cause, not a symptom.

Most valuation gaps are not fundamentally disagreements about numbers. They are disagreements born from unequal information. The buyer has conducted diligence; the seller has lived the business. Each party believes they understand the company better than the other and in different ways, they’re both right. The seller knows the relationships, the pipeline, the culture, and the intangibles that never appear on a financial statement. The buyer knows what the market will pay for comparable assets, what integration costs look like, and what the risk-adjusted return needs to be. In M&A deals, the buyer is typically responsible for tracking and reporting earnout performance metrics post-close, leaving the seller with limited ability to verify the calculations a structural information imbalance that becomes a breeding ground for disputes.

The practical implication for advisors is to surface and systematically reduce information asymmetry before it calcifies into a valuation impasse. A well-run sell-side process, with a comprehensive CIM, normalized financials, and transparent disclosure of risks, does more to narrow a valuation gap than almost any structural mechanism. When a buyer has high-quality information, they price risk lower. When they’re left to fill gaps themselves, they fill them with discounts.

Market context shapes the gap… and both parties need to read it accurately.

Valuation gaps are not static. They widen and narrow with market conditions, interest rates, credit availability, and buyer appetite. According to Capstone Partners’ 2024–2025 Global M&A Trends Survey, 69% of investment bankers reported that recurring revenue was the most important characteristic to acquirers up 6% from the prior year reflecting buyers’ growing insistence on financial visibility and predictability before committing to full upfront consideration. Strategic buyers, who often have greater operational synergies to draw upon, have shown more ability to address valuation gaps than financial buyers, partly explaining their growing share of mid-market deal activity.

Sellers who entered a process with a valuation expectation formed at the peak of the 2021–2022 cycle are operating with a dangerously outdated reference point. The gap they perceive between their number and the market’s number is real but it is not necessarily the buyer’s fault or the buyer’s problem to solve alone. Part of what a good M&A advisor brings to a mandate is the candid, early conversation about where the market actually is, so the seller’s expectations are calibrated before they sit across from a buyer, not after.

Timing is its own form of valuation.

One dimension of valuation gaps that rarely gets discussed directly is timing risk…the asymmetric way buyers and sellers experience the passage of time in a deal. For a seller, time is eroding certainty and creating anxiety. For a buyer, time is an opportunity to continue diligence, revisit assumptions, and occasionally renegotiate. This dynamic means that the longer a deal takes to close, the more the gap can re-open, even after it appeared resolved. Conditions change. Audited financials come in slightly different from management accounts. A key customer signals uncertainty. A rate move changes the buyer’s cost of capital. BCG research found that around 40% of deals fail to close on the timeline set in deal documents, with nearly two-thirds of delayed deals requiring three or more additional months…a timeline extension that introduces meaningful re-pricing risk on both sides.

Managing timeline is therefore an active part of bridging a valuation gap, not a passive one. Advisors who allow a deal to drift are not simply tolerating inefficiency…they are allowing new gaps to form.

The structure of the gap matters as much as its size.

Not all valuation gaps are created equal, and advisors who treat them as a single undifferentiated problem miss the point. Some gaps are mechanical whereas they arise from different EBITDA normalization assumptions, different views on net working capital peg, or different discount rate inputs. These can often be resolved with data. Other gaps are strategic wherein the buyer sees a different future for the business than the seller does, or prices synergies differently, or applies a different control premium. These require structured solutions. And some gaps are emotional versus rooted in the seller’s attachment to their business, their sense of what they deserve, or their reluctance to acknowledge what the market will bear. These require patience, relationship, and sometimes time.

Conflating all three types leads to the most common advisory mistake in gap negotiation: throwing financial structure at an emotional problem, or vice versa. A seller who feels unheard will not be appeased by a better earnout formula. A mechanical discrepancy in working capital methodology will not be resolved by telling a seller their business has strategic importance. Diagnosing the type of gap before reaching for a solution is what separates experienced advisors from those who are simply going through the motions.

Buyers carry cognitive risk too.

Most of the conversation around valuation gaps focuses on seller psychology, and with good reason as sellers are usually the ones who feel the gap most acutely. But buyers carry their own set of cognitive distortions. Confirmation bias leads acquisition teams to over-weight information that validates their thesis and underweight signals that challenge it. Research from NYU Stern found that 70–75% of acquisitions fail to create shareholder value, with valuation misjudgments contributing to both deal abandonment and post-close underperformance across a dataset of 40,000 transactions. Buyers who close a gap by convincing themselves the seller’s number was right without the evidence to support it have not bridged a valuation gap. They have simply deferred the reckoning.

The best buyers approach a valuation gap with intellectual honesty about what they know, what they’re assuming, and what they’re choosing to believe. That discipline, more than any particular structural tool, is what makes for a durable deal.

Valuation gaps are not a problem to be solved so much as a reality to be understood. They are present in nearly every mid-market transaction in some form, and the parties who navigate them best are not necessarily the ones with the most sophisticated financial structures at their disposal. They are the ones who understand what is actually driving the gap, who have done the work to calibrate expectations before sitting down at the table, and who treat the space between two numbers not as a battlefield but as a design problem.

For sellers, that means knowing what you are truly optimizing for before the process begins. For buyers, it means approaching the gap with intellectual honesty rather than the quiet confidence of a thesis you have already decided to believe. And for M&A advisors, it means being willing to have the uncomfortable conversations early, because a gap that is managed well at the outset is almost always easier to close than one that has been allowed to harden into a position.

The beautiful closet full of Louboutins I would have accumulated by now is proof enough that valuation gaps are not going anywhere. But neither is the art of bridging them.

Reece Tomlinson is a CPA, MBA and the Founder & CEO of RWT Capital Corp., a boutique mid-market M&A advisory firm. She has advised on $3B+ in transactions across 130+ mandates in 16 countries. She is a WXN Canada Top 100 Most Powerful Women recipient, sits on the UBC Dean's Advisory Council, and is writing her first book, The Uncommon Exit. Uncommon Capital publishes weekly.

‍