Bridging valuation gaps

October 2026  |  FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

October 2026 Issue

Persistent valuation gaps have become one of the defining challenges facing the M&A market in recent years. While dealmaking has shown signs of recovery in 2026, many transactions continue to stall as buyers and sellers struggle to agree on what businesses are truly worth in an environment shaped by higher interest rates, geopolitical uncertainty, uneven economic growth and rapidly evolving technology.

Sellers often remain anchored to valuations achieved during the era of ultra-cheap capital, while buyers have become increasingly disciplined, factoring in higher financing costs, execution risks and more cautious growth assumptions. The result is a widening expectations gap that has slowed negotiations and extended deal timelines across multiple sectors.

Yet rather than bringing activity to a standstill, these conditions are encouraging greater creativity in transaction structuring. Earnouts, deferred consideration, contingent value rights, vendor financing and minority investments are increasingly being used to bridge differences and share risk between counterparties. At the same time, more sophisticated approaches to due diligence, financial modelling and scenario planning are helping dealmakers build confidence around future performance.

How investors, advisers and corporate acquirers close valuation gaps and reshape the art of dealmaking in today’s more demanding M&A landscape will continue to influence market activity in the years ahead.

The valuation disconnect

Even as broader market conditions improve and confidence gradually returns, valuation gaps continue to frustrate dealmaking across many sectors. Sellers remain reluctant to abandon expectations shaped by previous market highs, while buyers are applying stricter pricing discipline.

Jonathan A. Dhanawade, a partner and head of private capital solutions at Mayer Brown LLP, argues that valuation gaps continue to stem from a disconnect between buyer and seller expectations. Sellers continue to reference valuations achieved during the low interest rate environment of 2020-21, while buyers are adjusting to a higher-cost, more uncertain market. Higher rates, geopolitical instability, tariff-related disruption and questions surrounding the long-term value of AI have all widened that divide.

“Sellers continue to benchmark against historic highs achieved when capital was cheap and multiples were elevated, particularly the 2020-21 vintage, while buyers are pricing off a materially different cost of capital, tighter credit conditions and more conservative growth assumptions,” he says. “The federal funds rate remains well above the near-zero environment that underpinned peak valuations, and the trajectory going forward is far from certain.

“Layer on tariff-driven disruption that materially slowed deal activity in 2025, ongoing geopolitical risk, and the emerging question of whether artificial intelligence (AI) is creating or destroying value in particular sectors, and the result is two parties looking at fundamentally different discount rates and forward earnings assumptions for the same asset,” he continues. “From what we are seeing in the market, mid-market dealmakers remain constrained by valuation gaps, geopolitical volatility and a stubbornly high private equity (PE) exit backlog, even as megadeal activity surges.”

While sellers continue to defend pricing based on historical benchmarks, buyers are reassessing value through the lens of a fundamentally different economic environment, creating one of the defining dynamics of today’s M&A market.

Anchoring remains common among sellers that raised capital or achieved valuations during the market peak of 2020-21, making many reluctant to accept lower valuations today. According to Mr Dhanawade, the valuation gap has complicated dealmaking for several years, although expectations are beginning to converge as sellers adjust to current market conditions.

Buyers, meanwhile, are underwriting acquisitions against higher borrowing costs and applying greater caution, resulting in lower entry multiples and stricter scrutiny of projected growth. They are generally unwilling to pay for growth that is not already evidenced by performance. One notable exception remains top-tier assets, where sponsor competition continues to support premium pricing.

Creative paths to completion

When valuation gaps cannot be reconciled through price alone, attention inevitably turns to deal structure. Rather than allowing negotiations to collapse, many dealmakers are employing increasingly sophisticated mechanisms that enable both parties to share future risk and reward while preserving the possibility of completing strategically important transactions.

Contingent consideration structures have evolved from specialist tools into mainstream transaction features, particularly in secondaries, general partner (GP)-led deals and acquisitions involving life sciences businesses.

“Deferred purchase price mechanisms, earnouts and integrated debt financing have, in many cases, become standard features in secondaries and GP-led deal structuring,” observes Mr Dhanawade. “Contingent value rights and earnouts let sellers capture upside if performance targets are met while giving buyers protection against overpaying for unproven growth. Vendor financing and deferred consideration reduce upfront cash outlay and can signal seller confidence in the business.

“The key in each case is careful drafting around metrics, measurement periods and governance rights during the earnout period. Courts will scrutinise these provisions retrospectively, so clarity on operational conduct covenants and measurement methodology is critical to managing post-closing dispute risk,” he adds.

While these structuring tools have become commonplace, their effectiveness often depends on the characteristics of the underlying business. Valuation gaps are far from uniform across the market, with some industries proving considerably more difficult to price than others.

Valuation disparities remain especially pronounced in sectors experiencing rapid technological disruption or structural change. “In technology, software M&A aimed at acquiring AI capabilities has cooled, with sector valuations re-rated lower as buyers struggle to distinguish durable AI-driven value from hype,” notes Mr Dhanawade. “In many cases, that same scrutiny is spreading to IT services, professional services and insurance brokerage. Within software, valuation dispersion is stark – high-growth software as a service businesses trade at multiples several times those of typical middle market tech deals, creating a wide gap in expectations depending on where a target sits on the quality spectrum.

“In life sciences, the impending patent cliff for major biopharma companies is compressing valuations for loss-of-exclusivity-exposed players, while assets with de-risked pipelines in oncology and metabolic disease command significant premiums,” he continues. “Real estate-heavy and rate-sensitive sectors, such as infrastructure and certain energy assets, also continue to see friction as capitalisation rate expectations adjust.”

This analysis suggests that businesses valued during the low interest rate era remain particularly exposed to valuation resets.

Scrutiny beyond the numbers

Higher borrowing costs have altered not only what buyers are prepared to pay but also how they evaluate risk, test assumptions and approach due diligence before committing capital.

Effective due diligence has become increasingly important as buyers and sellers seek to bridge persistent valuation gaps. Beyond validating financial performance, today’s due diligence processes focus on identifying hidden risks, testing growth assumptions and assessing organisational resilience.

Buyers are increasingly focused on downside risks rather than optimistic growth scenarios. Diligence processes have become more detailed, particularly around earnings quality, working-capital adjustments and the sustainability of growth – a trend reinforced by insurers providing representations and warranties insurance (RWI).

RWI has become a common feature of sponsor-backed and middle market transactions. Market participants report increased use of conditional terms, shorter survival periods and broader reliance on insurance-backed structures to manage risk allocation. Deal timelines also increasingly account for financing certainty requirements, while bidders in competitive auctions are often expected to proceed without financing contingencies.

Sponsors under pressure

PE firms continue to play a significant role in the market, although they have become more disciplined on valuation due to the higher cost of leverage. While transaction volumes appear lower than in previous years, completed deals tend to be larger, indicating a concentration of capital on higher-conviction opportunities.

Sponsors remain competitive through creative structures, including add-on acquisitions, minority investments, structured equity arrangements and continuation vehicles. Club deals and co-investments are also helping firms manage larger equity requirements in tighter financing markets. Family offices are increasingly providing an alternative source of long-term capital in parts of the middle market.

Financial sponsors are not alone in adjusting their tactics. Successful transactions increasingly depend on both sides moving beyond entrenched positions and establishing realistic valuation expectations early. Focused due diligence, clear communication of pricing assumptions and thorough preparation can improve deal outcomes. At the same time, buyers are increasingly willing to pay premiums where acquisitions offer compelling strategic benefits and long-term growth opportunities.

Strategic buyers continue to pay premium valuations when acquisitions provide access to capabilities that would be difficult, costly or time-consuming to develop internally. Although enthusiasm surrounding AI-related transactions has become more measured, acquirers remain willing to pay for assets that offer durable competitive advantages.

Areas attracting the strongest premiums include data-centre infrastructure, power assets supporting AI expansion and differentiated platform capabilities. These investments are increasingly justified by long-term strategic positioning rather than expectations of financial engineering or multiple expansion. Boards are typically more willing to approve premium valuations when the strategic rationale is well supported and difficult for competitors to replicate.

A market reset?

The willingness of organisations to pay for strategic value also raises a broader question about the direction of the market, particularly as valuation gaps continue to narrow.

Market conditions indicate that valuation gaps are gradually narrowing as expectations adjust and more flexible transaction structures gain acceptance. “The gap has already begun to close due to a realignment of expectations and creative deal structures, and the strength of recent global deal volumes suggests that transactions are clearing at workable prices where motivation exists on both sides,” says Mr Dhanawade. “However, we would not expect a full return to prior multiples. The cost of capital, credit availability and risk appetite that supported peak valuations were exceptional. Buyers have internalised a level of discipline, around quality-of-earnings scrutiny, downside analysis and structured consideration, that is likely to persist through the cycle.

“The market is also becoming structurally K-shaped: megadeal values are up, volumes in the mid-market remain subdued, and capital is concentrating in sectors with demonstrable long-term demand, while repricing those exposed to disruption,” he adds.

The current environment could therefore be characterised as a lasting market recalibration rather than a temporary anomaly.

The road ahead

Regardless of what form the ‘new normal’ takes, some dealmakers are already looking beyond the current cycle and toward the next phase of M&A, shaped by evolving financing conditions, technological disruption and changing investor priorities.

Looking ahead, market participants are expected to continue embracing more rigorous diligence processes, increasingly supported by AI-driven analysis. The substantial backlog of PE-owned assets is also likely to influence market dynamics and pricing behaviour.

“The PE exit backlog remains historically elevated, a growing share of portfolio companies have been held for more than five years, and the pressure to clear that inventory will bring supply to market, likely at more realistic pricing,” explains Mr Dhanawade. “Corporate acquirers should be building flexibility into deal structures now, stress-testing valuation models against a range of rate and growth scenarios and ensuring governance and diligence processes can move quickly when attractive opportunities emerge.

“For PE sponsors, the ability to combine multiple financing tools strategically, namely, private credit, hybrid capital and co-investments, is becoming a hallmark of competitive positioning,” he continues. “Business owners considering a sale should focus on the fundamentals that underpin valuation – earnings quality, revenue durability, customer concentration and margin resilience. They should be prepared to engage credibly on a base case that reflects current conditions rather than historical marks.”

Businesses that adapt to these realities and enter the market with realistic expectations are likely to achieve better outcomes than those still anchored to peak-era pricing.

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Richard Summerfield