Meaning
Price discrepancies arise when the internal expectations of a seller do not align with the offers received from the market. A valuation gap typically occurs during exit negotiations or fundraising rounds when projected worth does not match data from actual buyers. It represents the distance between a founder’s internal model and an external appraisal.
The gap is closed only when a transaction occurs or a new appraisal is accepted.
Price Disagreement
Parties often rely on different metrics to arrive at their numbers. While a founder might look at future growth, a buyer focuses on historical cash flow, creating a valuation gap. The record of these differing offers shows the range of perceived value for the business assets.
It serves as a data point for future negotiations and a reality check for the board.
Market Reality
Settlement of the difference requires a concession from one or both sides. A valuation gap that persists for too long can stall a sale and cost the company its window of opportunity. The time spent debating the number is a direct cost to the founders’ capacity to start their next project.
Concession Requirement
Moving toward a deal involves the adjustment of financial expectations. A valuation gap is bridged through earn outs or other performance based terms. Documenting the reasons for the final price provides a clear end to the founders’ tenure.
