Value vs. Price: Bridging the gap in SME acquisitions

One of the most common challenges in acquiring a SME is the gap between what the seller believes the company is worth and what the buyer is willing to pay.

Sellers’ valuation expectations remain one of the biggest obstacles to closing M&A transactions. According to one of the latest Dealsuite studies, advisors reported that sellers’ expectations were too high in more than half of deal processes, ultimately causing the deals to collapse.

This distinction is particularly relevant in SF acquisitions. Searchers are often first-time buyers negotiating with entrepreneurs who may have spent decades building their businesses, while simultaneously having to convince their investors of the deal’s merits. The seller and the searcher can therefore look at exactly the same company and arrive at very different conclusions about its value.

Bridging this gap requires more than negotiating an EBITDA multiple. It involves understanding the seller’s perspective, assessing the business objectively, managing expectations and, when necessary, using creative deal structures.

1/ Value vs. Price:

For a seller, the value of a business is often much more than its financial performance.

An owner may have spent 20 or 30 years building the company, developing customer relationships, creating jobs and establishing a reputation in the market. This can create a strong emotional attachment and influence their perception of what the business is worth.

Sellers may also place significant value on:

• Future growth potential: The owner may believe the company has substantial opportunities that have not yet been fully realized.
• Legacy: Particularly in family-owned businesses, the future of employees, customers and the company’s reputation can be an important consideration.
• Past investment: Owners may take into account the time, capital and personal sacrifices they have made over the years.
• Strategic potential: Sellers may believe that a larger or better-capitalized owner could significantly accelerate the company’s growth.

For the searcher, however, the business is ultimately an investment.

The price they can justify is typically based on the company’s historical and expected financial performance, cash generation, market comparables, risks and the potential return that can be achieved after the acquisition.

This creates a fundamental difference: the seller is often focused on the value of what they have built and what it could become, while the buyer is focused on the price they can justify based on the risks and returns associated with the investment.

2/ The psychological side of valuation

Acquisition negotiations are not purely financial. Psychological factors can have a significant impact on both parties.

Anchoring: The first valuation mentioned can become an important reference point for the entire negotiation. A seller who starts with a high asking price can make a buyer’s offer appear low, even when the buyer’s valuation is supported by market data.

Loss aversion: Sellers may worry about selling too cheaply and later regretting the decision. Buyers face the opposite concern: paying too much and discovering that the expected value creation does not materialize.

Confirmation bias: Both sides can selectively interpret information. Sellers may focus on growth opportunities and customer relationships, while buyers may emphasize concentration risks, operational weaknesses or margin pressures.

Emotional attachment: For many owners, selling a business is not simply a financial transaction. It represents the end of an important chapter of their lives. Recognizing this can be particularly important for searchers, who need to build trust with owners throughout the process.

3/ How searchers can bridge the valuation gap:

• Understand the seller’s perspective:

The first step is not necessarily to challenge the seller’s valuation, but to understand it.

Searchers should ask how the owner arrived at their expectations and what factors are most important to them. Is the valuation based on comparable transactions? Future growth? A previous offer? Or simply what the owner believes they need to retire or move on?

Understanding the reasoning behind the number can make the subsequent negotiation much more productive.

It can also reveal that price is not the seller’s only priority. Continuity, employees, legacy and the identity of the future owner can sometimes be as important as the headline valuation.

• Support the offer with data:

Once the seller’s perspective is understood, the searcher needs to clearly explain their own valuation.

This can include:

• Historical revenue and EBITDA performance
• Quality and sustainability of earnings
• Industry and transaction múltiples
• Revenue concentration and customer retention
• Working-capital requirements
• CAPEX needs
• Management and owner dependency
• Industry-specific risks
• Expected cash generation
• Downside scenarios and potential value creation

The objective is not necessarily to convince the seller that their valuation is “wrong.” Instead, the searcher should demonstrate why the proposed price is rational from an investment perspective.

• Separate existing value from future value creation:

This is particularly important for searchers.

A searcher may identify significant opportunities to improve the business after closing: professionalizing the company, expanding into new markets, improving pricing, implementing technology or pursuing acquisitions.

But paying the seller upfront for all of this potential can significantly reduce the buyer’s future return.

A useful distinction is therefore between value that already exists in the business and value that the searcher expects to create after the acquisition.

The seller may believe that the company’s future potential should be reflected fully in today’s price. The searcher, meanwhile, may argue that they are taking the execution risk required to turn that potential into actual value.

Finding a balance between these two perspectives is often central to the negotiation.

• Use deal structure, not just price:

When the valuation gap cannot be solved by changing the headline price, the structure of the transaction can provide an alternative.

Earn-outs can link part of the consideration to future performance, allowing the seller to participate in the upside if the business achieves agreed targets.

Seller financing can allow the seller to finance part of the acquisition, reducing the buyer’s upfront cash requirement while potentially demonstrating the seller’s confidence in the company’s future performance.

Deferred consideration can spread payments over time and help reconcile different expectations around value and cash flow.

Equity retention can allow the seller to retain a minority stake and participate in future value creation, which can be particularly attractive when the owner believes strongly in the company’s growth prospects.

These mechanisms do not eliminate the valuation difference, but they can help allocate risk and future upside between the buyer and seller.

4/ Manage expectations early

Many valuation disputes become difficult because they are addressed too late.

Searchers should try to understand the seller’s expectations as early as possible, ideally before significant time and resources have been invested in the process.

Early discussions around valuation methodology, key financial metrics and the factors that could influence the final price can prevent major surprises later.

At the same time, searchers should avoid becoming overly focused on valuation at the expense of the relationship. In many SME transactions, the seller needs to feel comfortable with the person who will take over the business.

5/ The objective is not always the lowest price

For a searcher, a successful negotiation is not necessarily one in which the seller accepts the lowest possible price.

A high-quality business with recurring revenue, strong customer retention, attractive margins and a capable team may justify a higher valuation than a weaker business with a lower headline multiple.

The key question is therefore not simply: “Can I buy this company cheaply?”, it’s: “Does the price make sense given the quality of the business, the risks I am taking and the returns I can realistically achieve?”

Ultimately, the goal is not necessarily for buyer and seller to agree on what the business is “worth.” The goal is to find a price and transaction structure that both sides can accept, and that gives the searcher a realistic opportunity to create value after closing.