The Valuation Gap Is Often an Information Gap

Market Commentary – 1 September 2026

Valuation disagreements are a persistent feature of transaction markets.

Sellers naturally look backwards as well as forwards. They know what has been invested in the business, what comparable companies have achieved and, often, what valuations might have been available under different market conditions.

Buyers approach the same company from another direction.

They assess the cash flows they expect to receive, the capital required to support future growth, the risks that could impair those cash flows and the value another owner may ultimately attribute to the company.

The difference between those perspectives is commonly described as a valuation gap.

In the European mid-market, that gap remains material. Recent market research indicates that sellers' valuation expectations are considered too high in approximately half of transaction processes, with a substantial proportion of those disagreements contributing to failed deals.

Yet not every valuation disagreement is fundamentally a disagreement about price.

Often, it is a disagreement about information.

The multiple is rarely the whole argument

Valuation discussions frequently become concentrated around multiples.

A shareholder believes the business deserves eight times earnings. A buyer considers six appropriate. Comparable transactions are identified. Sector averages are debated.

The apparent difference is two turns of EBITDA.

The underlying disagreement may be considerably broader.

What is the appropriate EBITDA?

How much of recent growth is repeatable?

Are current margins sustainable?

How concentrated are customer relationships?

What level of capital expenditure will be required?

How much working capital will future growth consume?

How dependent is the business on particular members of management?

How credible is the forecast?

Two parties can apply the same valuation multiple to materially different views of the company's economics and arrive at very different values.

Focusing exclusively on the multiple can therefore obscure the more useful discussion.

The valuation gap may begin with different assessments of the business itself.

Reported earnings and transferable earnings are not always identical

The distinction is particularly relevant in privately owned mid-market companies.

A successful owner-managed business may have evolved around financial arrangements appropriate to its existing shareholder.

Costs may include owner-specific expenditure. Management compensation may not reflect the structure required under institutional ownership. Certain functions may be performed personally by the shareholder. Property may sit outside the operating company. Historic acquisitions may distort comparisons between periods.

These circumstances are not unusual.

But they mean that reported earnings do not always provide an immediate answer to the question a buyer is asking.

The buyer wants to understand the earnings capacity of the business under future ownership.

Adjustments can therefore become an important part of transaction analysis.

Some are straightforward.

Others are more judgemental.

If an owner performs substantial executive responsibilities without market-based remuneration, a buyer may need to introduce a corresponding cost.

If an exceptional expense genuinely will not recur, it may reasonably be removed from an assessment of underlying performance.

If cost savings have been identified but not implemented, treating them as though they already exist is more difficult.

This is why quality-of-earnings analysis matters.

It is not simply an accounting exercise.

It is an attempt to establish which elements of historical performance are likely to transfer to the next owner.

Forecast credibility can affect valuation more than forecast ambition

Future growth is another frequent source of disagreement.

A seller knows the opportunities available to the business.

New customers may be under discussion. Additional markets may be opening. Capacity investment may support higher output. A product launch may be approaching.

The buyer sees those opportunities but also has to assign probabilities to them.

That distinction can produce very different valuations.

A forecast showing rapid growth does not necessarily increase buyer confidence.

In some circumstances, it can have the opposite effect if the assumptions are difficult to reconcile with historic performance, existing capacity or identifiable commercial initiatives.

The strongest forecasts are therefore not necessarily the most ambitious.

They are the most explainable.

A buyer should be able to understand how revenue growth is expected to arise, what investment it requires, how margins respond and what evidence already exists within the business.

Where the bridge between historical performance and future expectations is clear, buyers can underwrite growth with greater confidence.

Where it is not, future upside is more likely to be discounted.

The apparent valuation gap is then partly an information gap between what the seller believes will happen and what the buyer can substantiate.

Uncertainty is usually priced

Transaction markets do not require every business to be perfect.

They do require uncertainty to be assessed.

A company with significant customer concentration can still be highly attractive if those relationships are durable and well understood.

A business with substantial capital requirements may still warrant a strong valuation if the returns on that capital are demonstrable.

A founder-dependent organisation can remain attractive if there is a credible management transition.

The difficulty arises where material risks exist but cannot be quantified or explained.

Buyers then have to make assumptions.

Those assumptions tend to be conservative.

This can affect valuation directly, but it can also appear elsewhere in transaction terms.

A buyer may seek greater warranty protection, defer part of the consideration, introduce an earn-out or make completion conditional upon particular events.

These mechanisms are often described as ways of bridging valuation gaps.

More precisely, they are mechanisms for allocating uncertainty.

An earn-out, for example, does not necessarily mean the buyer and seller have agreed on value.

It means they have agreed that part of the value will depend on whether a future outcome actually occurs.

That can be appropriate.

But it also illustrates why reducing uncertainty before negotiations begin can be economically valuable.

Sellers possess information buyers do not

There is an unavoidable asymmetry in most transactions.

The seller has lived with the business.

The buyer has not.

A shareholder may understand instinctively why an important customer is unlikely to leave, why a weak quarter is anomalous or why a particular competitor presents little genuine threat.

Those conclusions may be entirely correct.

The difficulty is that the buyer cannot acquire the seller's accumulated experience alongside the shares.

It has to reconstruct that understanding through information.

This is one reason transaction preparation matters.

Customer cohort data, contract history, margin analysis, commercial pipeline information, management reporting and well-supported forecasts can translate internal knowledge into evidence accessible to a prospective owner.

The purpose is not to overwhelm buyers with data.

More information does not automatically mean better information.

The objective is to identify the assumptions most important to the value of the company and provide sufficient evidence for them to be assessed properly.

Where that happens, a buyer can distinguish genuine risk from uncertainty created simply by a lack of visibility.

Better information does not guarantee a higher price

There is an important limit to the argument.

Not every valuation gap can be solved through diligence.

Sometimes the seller's expectations are simply above the value available in the current market.

Sometimes buyers have genuinely different views of future prospects.

Sometimes financing conditions constrain the price that can be supported.

And sometimes the strategic value of continuing to own the company exceeds the value another party is currently prepared to pay.

Better information does not eliminate these differences.

Nor should transaction preparation become an attempt to manufacture a valuation that the underlying business cannot support.

Its value is more fundamental.

Clear information makes the disagreement itself clearer.

If buyer and seller ultimately reach different conclusions after working from a well-understood set of facts, the shareholder can make a more informed decision about whether to transact.

If the difference results principally from unexplained performance, uncertain forecasts or poorly understood risks, there may still be work to do before price becomes the central question.

Valuation starts with understanding the business

Mid-market transactions will continue to produce differences between buyer and seller expectations.

That is inherent in a process where one party has owned the business and another is underwriting its future.

But headline valuation differences should not automatically be interpreted as evidence that one side is unrealistic.

Before debating the multiple, it is worth understanding what each party believes it is applying that multiple to.

The more clearly recurring earnings, future investment requirements, customer economics, management capability and growth assumptions can be understood, the more useful the valuation discussion becomes.

Information will not always close the gap.

It can determine whether the gap is genuinely about value.