Reading: Introduction

A common situation in negotiations is that the maximum price the buyer is willing to pay today (the buyer's so-called reservation price) is lower than the minimum price the seller is willing to accept (the seller's reservation price). Consequently, there is a valuation gap, a difference between the valuation of the buyer and seller.

Obviously, a valuation gap is more of a challenge if the buyer's reservation price is below that of the seller. If the buyer is willing to pay more than what the seller is asking for, there is also a valuation gap, but is should be easy to find a deal that makes everybody happy. For example, if the seller wants at least 10 million and the buyer is willing to pay as much as 12 million, any transaction price between 10 and 12 million will add value to both parties. It is important to note, however, that even in such situations, proper deal structuring can be very beneficial to the parties of the deal. 

There are three general approaches to bride a valuation gap:

• Find and correct the reason for the gap
• Find an ownership structure that accommodates the gap
• Fina the appropriate contractual solution that accommodates the gap