The Situation
A Tale of Two Markets: M&A in the Lower Middle Market for Q3 2025
If you only read the headlines, you might think M&A is roaring back. The IPO window is reopening, mega-deals are pushing values higher, and corporate acquirers are regaining their appetite for risk.
On the other hand, the lower middle market (LMM) remains in a more sluggish phase. Deals between roughly $10 million and $250 million remain harder to close, lenders are still conservative, and buyers are pickier than ever. Deal activity is muted, financing remains tight, and buyer cautiousness persists.
For owners of privately held companies who have taken the wait and see approach, the message is clear: Timing alone won’t drive a successful sale—readiness and realism will.
What the Data Tell Us
- In the first half of 2025, global M&A volumes declined by about 9% versus the same period in 2024, while deal values increased about 15%. (PwC+3PwC+3Africa Private Equity News+3)
- For the lower middle market specifically, Independent Investment Bankers Corp. (IIB) reports that April 2025 saw just 555 U.S. lower‐middle‐market deals executed—the lowest monthly total since May 2009. (IIB)
- IIB also notes global deal counts fell nearly 19% from the previous quarter in the LMM space. (IIB)
- In sector and regional breakdowns:
- In the technology, media & telecom (TMT) sector: first half of 2025 volumes were down ~11%, while values increased ~20%. (PwC)
- According to IIB, one of the headwinds is widening valuation gaps—“a significant gap between seller valuation expectations and buyer appetite developed.” (IIB)
- Interest rates and cost of capital continue to hinder LMM deals which often rely on leveraged or semi‐leveraged structures.
In short: fewer deals are closing, and the ones that are closing tend to be high quality—but many “middle market” deals (especially on the lower end) are being deferred.
Why the Lower Middle Market is Slow
Several interlocking factors are conspiring to keep LMM M&A on the sidelines:
- Financing & cost of capital
With higher interest rates and tighter credit, the cost of funding acquisitions in the LMM is elevated. Private equity sponsors and strategic buyers are more cautious about leveraging deals when financing terms are less favorable. - Valuation and expectation disconnects
Sellers in the lower middle market may still be anchored to pre-pandemic or 2021/2022 peak multiples, while buyers are pricing in increased risk, slower growth and higher cost of capital. The result: bid‐ask spreads widen, and fewer deals reach closing. IIB notes this has caused many owners “to shelve sale plans rather than accept lower pricing.” (IIB) - Geopolitical, regulatory and macro uncertainty
Tariffs, trade policy, labor constraints, supply chain risk and regulatory uncertainty weigh more heavily when the deal size is smaller and the risk buffer is thinner. IIB cites that “tariff-induced uncertainty” played a major role in the slowdown. (IIB) - Selective buyer focus (“flight to quality”)
Buyers are concentrating on companies that are growth-ready, well managed, and have strong narratives. IIB refers to this as a “flight to quality … auctions in some cases are more competitive than before.” (IIB) That leaves more marginal lower middle market businesses waiting for their moment. - Regional / supply chain and sector nuance
Some sectors (e.g., manufacturing with heavy trade/supply‐chain exposure) remain more constrained; others (e.g., service businesses, asset-light models) are holding up better. The geography of deals is shifting – for instance, increased focus on domestic or intra-regional deals rather than complex cross-border transactions. (Africa Private Equity News+1)
Outlook for Q3 and Remaining 2025
While the beginning of 2025 (and Q2 in particular) showed deep weakness in LMM activity, the ingredients for recovery are present:
- That un-deployed capital (so-called “dry powder”) remains large, meaning when buyers feel comfortable trending is improving, activity may accelerate. IIB argues the slowdown “is best viewed not as a harbinger of permanent decline, but as a moment of recalibration.” (IIB)
- If interest rates decline, credit markets loosen, and macro/regulatory uncertainties ease, that could trigger a rebound in deal flow in the lower middle market.
- Sector specific tails (healthcare, digital services, SaaS, asset-light services) remain favourable.
- Sellers in the lower middle market who are prepared (i.e., have clean financials, solid narratives, operational improvements, address diligence risks) will be well positioned to move quickly.
- The market that many sellers hoped for—“everyone can sell at peak multiples”—has not yet arrived for the LMM. Waiting for the perfect moment may lead to delay.
Implications for Business Owners and Advisors
- If you’re a founder or owner of a lower middle market business (or working with one), this is NOT the time to be complacent and wait for “better” market conditions without preparation.
- Instead, use this time to get ready:
- Clean up the financials, tighten operations, document growth stories.
- Understand your valuation drivers and what buyers will scrutinize (earnings quality, customer concentration, growth sustainability, regulatory/supply chain risk, labor issues).
- Evaluate your exit timeline with realistic expectations about multiple compression, deal structure shifts (more earn-outs, more seller notes, rollover equity).
- Engage advisors early to help you prime the business for sale—since when the tide turns, speed matters.
- Clean up the financials, tighten operations, document growth stories.
The Bottom Line
No matter what the market is like today, if you want to sell your business, now is the time to get prepared so you can capture the best value when opportunity knocks. Being well-positioned ahead of a rebound will differentiate your company. When buyers shift from “wait and see” to “act now,” the prepared seller will win. So today may not yet be the perfect moment to sell—but it is the perfect moment to start getting ready for your moment.
