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by Partner Contributed Article on March 13, 2025
Despite mid-year turbulence in 2024 when some deals lost momentum or fell through, the lower middle market showed resilience with high-quality transactions leading the way early in the year and a gradual return to normalcy by year's end.
As we enter 2025, January's increased activity over Q4 2024 suggests a more balanced market between buyers and sellers, with stable valuations and growing optimism pointing toward stronger deal volume in the latter half of 2025.
While the Fed indicates a slower pace of rate cuts may be appropriate in 2025 – signaling a more measured approach to monetary policy adjustments – the reduction in interest rates has already yielded increased market certainty and improved planning conditions for transactions.
With $2 trillion in private equity dry powder and strategic buyers actively seeking growth opportunities, particularly in manufacturing and technology sectors, market fundamentals support continued deal momentum.
Market Dynamics and Expectations
Recent data from the Association for Corporate Growth's (ACG) 2025 Middle-Market M&A Outlook Survey reveals that respondents expect higher deal volume in 2025 compared to 2024, with 25% anticipating significantly more activity.
This optimistic outlook is driven by several key factors:
Private Equity Deployment
$2 trillion in PE dry powder on the sidelines, ready to be deployed. The velocity of this capital deployment is expected to increase as 2025 progresses, particularly in the second half of the year.
Market Evolution
The first half of 2025 is likely to see strategic acquisitions dominating the landscape, followed by a shift toward private equity-driven transactions in the latter half. This transition is expected to bring larger deal sizes and a move from add-on acquisitions back to platform strategies.
Valuations and Deal Structure
While some market participants anticipate higher multiples in 2025, nearly a majority expect valuations to remain stable. This stability, combined with more predictable interest rates and improved market confidence, creates favorable conditions for both buyers and sellers.
Market Catalysts and Challenges
The 2025 lower middle market outlook is shaped by several key factors:
Interest Rates and Economic Policy
While the market anticipates potential interest rate cuts, the LMM M&A market's robustness isn't solely dependent on rate reductions. The stabilization of rates and clearer economic visibility provide sufficient confidence for deal-making.
Cross-Border Activity
With the political landscape settling post-election, increased international or cross-border M&A activity is expected as foreign companies adapt to the new administration and seek to establish or expand their U.S. presence.
Private Equity Cycles
The private equity investment cycle, which has been elongated in recent years, is expected to drive significant activity in 2025. PE sell-sides are projected to increase dramatically compared to the previous 24 months, particularly in the second half of the year.
Industry Focus and Opportunities
Several sectors are positioned for particularly strong M&A activity in 2025:
- Manufacturing and Industrials: Increased activity is expected, driven primarily by international acquirers seeking U.S. footholds
- Blue-Collar Services: Private equity firms continue to show strong interest in residential, commercial, and industrial service companies
- Healthcare and IT: These sectors are anticipated to maintain robust deal flow, building on their historical strength in the M&A market
Navigating the Lower Middle Market M&A Landscape
Again, the 2025 M&A market appears well-positioned for robust activity, with several positive factors aligning:
- Balanced market conditions between buyers and sellers
- Stable valuations providing clarity for deal-making
- Strong private equity dry powder ready for deployment
- Strategic acquirers actively seeking growth opportunities
- International buyers increasing their U.S. presence
The market is expected to show steady improvement through Q1 and Q2, with a more significant surge in deal volume anticipated in the second half of the year. This progression aligns with historical patterns and allows market participants to adjust to the post-election environment and any potential policy changes.
As with any market forecast, it's important to note that these are general trends, and individual deal success will depend on company-specific factors, market timing, and proper execution.
Working with experienced M&A advisors remains crucial for navigating the complexities of transaction processes and maximizing value in what promises to be an active but competitive market environment.
Taking the Next Step with REAG
REAG’s investment banking team stands ready with the expertise, relationships, and proven processes to help you capitalize on this unique market opportunity.
Contact us today to begin a confidential discussion about maximizing your company’s value in today’s seller’s market.
