After navigating 2025's turbulence, market fundamentals align for robust transaction activity
Executive Summary: Executive Summary: The 2025 M&A market was a tale of two segments. Large multinational deals drove headline recovery at the high end, while the lower middle market was slower to rebound — showing initial signs of recovery but not yet a full rebound amid tariff uncertainty and a 43-day government shutdown. We anticipate that recovery to accelerate meaningfully in 2026, with $2 trillion in private equity dry powder currently on the sideline, elongated historic hold periods, and improving financing conditions positioning the LMM for 40-50% transaction volume growth.
After a year of divergent performance across market segments, the lower middle market is poised to catch up. For businesses valued between $15M-$200M, 2026 will deliver a post-COVID-like recovery fueled by pent-up demand and favorable deal conditions.
Key Takeaways: Based on GF Data through Q3 2025:
- Multiples stabilized at 7.3x TEV/EBITDA despite turbulence
- Platform activity rebounding
- Service sectors outperforming manufacturing/distribution
- Fed rate cuts creating favorable financing
- Q4 2025 volume expected up 30-35%
2025: Resilience Through Turbulence
Through Q3, 211 deals closed versus 288 in 2024 — a 27% volume decline. Yet multiples held at 7.3x, matching 2023-2024 levels, demonstrating valuation stability despite volume pressures.
Quarterly dynamics were revealing: Q1 volume was exceptionally low as tariff uncertainty froze activity. Q2 saw volume recovery but valuations dipped—deals re-traded in Q1 closed in Q2 with earn-outs offsetting uncertainty. Q3 showed volume decline to Q1 levels, but valuations climbed back up, indicating normalized deal structure with buyers writing bigger equity checks at close.
Q4 Expectations: M&A is highly seasonal — Q4 2024 drove total volume to exceed 2023 by 30%. Once published, we expect Q4 2025 to show 30-35% volume increase from Q3 (86-89 deals), bringing annual volume to 297-300 deals—down 23% from 2024 but in line with 2023. However, it will require a very big Q4 for that recovery to materialize.
Why 2026 Will Be Strong: The COVID-Tariff Parallel
The parallels are striking: both COVID 2020 and tariff 2025 caused six-month market freezes, deal re-trades, and manufacturing disruption. The 2021 recovery delivered 500+ transactions—significantly above 2020’s 342.
While 2026 won’t see artificial stimulus and zero-rates of 2021-2022, the “Big Beautiful Bill” provides meaningful support, incentivizing domestic manufacturing—the sector that dragged on 2025 M&A.
Four Key Drivers: $2T in PE dry powder must be deployed | Historic hold periods creating exit pressure | Fed rate cuts improving financing | Strategic buyers seeking Big Beautiful Bill reshoring opportunities
Sector Performance: Winners and Losers
While overall valuations held at 7.3x in 2025, industry-level analysis reveals significant divergence.
Manufacturing (6.7x YTD): Valuations declined in Q1 as the sector struggled with tariff turbulence. Volume disruption severe—2025 deals on pace to be just 55% of 2024 volume. Expect expansion to 7.0-7.5x with Big Beautiful Bill incentivizing reshoring.
Business Services (7.5x YTD): Up 0.5x from historical 7.0x average, offsetting manufacturing declines. Volume on pace to mirror 2024 levels, which were significantly elevated from 2022-2023.
Healthcare Services (8.5x YTD): Up nearly 1.0x from 7.7x in 2024 and five-year average. Volume on par with prior years.
INDUSTRY SPOTLIGHT: DISTRIBUTION SECTOR POISED FOR COMEBACK
Distribution was meaningfully disrupted in 2025 by tariff uncertainty, with volume on pace to be less than half the prior three years (15 transactions through Q3 versus 59 in 2021).
However, deals that closed appear of the highest quality. Valuations held at 7.2x — matching 2021-2023 pre-disruption levels. This demonstrates a flight to quality, with only best-positioned distributors successfully transacting. Platform acquisitions averaged 7.5x versus add-ons at 6.4x. Companies with above-average financials, experienced management, and institutional sellers commanded 8.2x — a 1.2x premium.
Sub-Sectors: Professional Equipment (7.0x, 18.1% margins) | Machinery & Equipment (6.5x, 14% growth) | Grocery (7.2x, larger deals 8.2x)
2026 Outlook: As tariff uncertainty resolves, we anticipate volume recovery and healthier valuations across the lower middle market.
The Quality Premium and Strategic Value
Companies with above-average financials commanded 7.3x versus 7.1x for standard buyouts—a 102% quality premium affecting 44% of transactions. Add-ons under $50M commanded 0.5x-1.0x premiums versus platforms, demonstrating strategic value.
The Size Premium: At $100M+ enterprise value, deals average 2.8x higher multiples—nearly three full turns of EBITDA. This critical breakpoint unlocks substantial value for business owners nearing this threshold.
Strategic Imperatives for 2026
For Business Owners: Markets are unlocking now. Waiting for “perfect” conditions means competing with a surge in supply. Be out in front. Don’t play from behind. Engage advisors 6-12 months before target transaction date.
For Buyers: Expect more competition in 2026 for quality assets and premium valuations. The most attractive opportunities won’t reach the broad market. Relationships with advisors like REAG deliver competitive advantage through proprietary deal flow.
Conclusion: Call It a Comeback
The data tells a clear story: 2025 will finish with volume similar to 2023 (297-300 deals), which was actually lower than 2020’s COVID-year volume. Yet 2021 and 2022 saw dramatic recoveries—500 and 333 deals respectively. We’re in the very early stages of a similar recovery. Don’t miss it.
That said,we do not anticipate the 2026 recovery to be as drastic as 2021-2022. Those were extraordinary times with massive economic stimulus and a zero-rate environment. We won’t see that policy support in 2026. But we will see meaningful recovery start in Q4 2025 and it will take off in 2026 — driven by fundamentals rather than artificial stimulus.
The window is opening: $2T in dry powder, aging PE portfolios, Fed rate cuts, and pent-up demand. REAG expects 40-50% volume increase, with quality companies commanding significant premiums. Distribution’s performance is particularly noteworthy—weathering challenges while maintaining valuations, with well-positioned distributors commanding 8.2x multiples.
Contact REAG today to discuss how you can take care of the value you’ve built without compromising the culture and relationships that matter most.
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