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The lower middle market remains resilient, but uncertainty around tariffs and profitability is tempering earlier optimism
The mergers and acquisitions landscape in 2025 presents a complex picture for business owners considering their exit strategies. As we navigate through the first quarter, the data tells an interesting story of resilience mixed with caution.
Market Overview: Quality Over Quantity
The current M&A environment is characterized by selective activity, with high-quality businesses commanding strong valuations while lesser performers struggle to find buyers. Enterprise values in the lower middle market (companies with $2-25 million in EBITDA) have shown surprising strength, with multiples for sub-$100 million deals actually increasing slightly from 2023 to 2024.
Key market dynamics:
- Deal volume exceeded 2023 levels, driven by a strong Q4 2024
- Smaller add-on acquisitions dominate activity
- Platform deals remain scarce
- Private equity dry powder continues building
Valuation Trends by Sector
Different industries are experiencing varied trajectories in the current market:
Manufacturing
– Multiples rising (6.5x in 2023 to higher levels in 2024), driven by domestic policy tailwinds and reshoring initiatives
Business Services
– Remaining flat but stable, consistent demand from both strategic and financial buyers
Healthcare
– Cooled from post-COVID highs (7.7x in 2024, down from 8.8x peak), with mental health services particularly active
Technology
– Continues to be volatile, with deal-specific factors driving wide valuation ranges
Blue-collar Services
– Surprisingly hot, with private equity rolling up HVAC, landscaping, and roofing companies
The Add-On Acquisition Phenomenon
The market’s current engine is add-on acquisitions – smaller companies being bolted onto existing portfolio companies. This trend reflects:
- Extended private equity hold times (now exceeding 10 years versus traditional 5-7)
- Risk-averse lending environment favoring proven business models
- Focus on operational improvements within existing portfolios
For business owners, this means opportunities exist primarily for companies that fit strategic gaps in existing platforms. Understanding where your business fits in potential buyers’ growth strategies has never been more critical.
Factors Tempering 2025 Optimism
While early 2025 started strong, several headwinds have emerged:
- Tariff Uncertainty – Potential trade policy changes are causing buyers to pause, particularly in import-heavy industries
- Profitability Concerns – Rising costs and pricing pressures threaten EBITDA stability, a deal-killer in due diligence
- Interest Rate Environment – Though stabilized, rates remain elevated compared to recent years, affecting deal math
- Global Risk Factors – International conflicts and supply chain disruptions add complexity
What Business Owners Should Do Now
The current environment demands proactive preparation:
1. Focus on Quality Metrics
- Reduce customer concentration below 20% for any single client
- Document and distribute key employee responsibilities
- Implement systems that reduce owner dependence
- Clean up financial reporting and improve margins
2. Understand Your Timing
Market multiples can vary significantly year-to-year. For instance, manufacturing companies traded at 7.3x EBITDA in 2022 versus 6.5x in 2023 – a difference worth $4 million on a $5 million EBITDA business.
3. Position for Strategic Value
With add-on acquisitions dominating, identify how your business could enhance existing platforms:
- Geographic expansion opportunities
- Complementary service offerings
- Operational synergies
- Technology or capability gaps
4. Prepare for Unsolicited Offers
You’re likely already receiving inquiries from potential buyers. Having a basic understanding of your business’s value and market position helps evaluate these approaches intelligently.
Looking Ahead: The Wait-and-See Market
The consensus among M&A professionals suggests 2025 will be a transitional year. While 52% of advisors expected increased deal volume entering the year, that optimism has moderated. The market awaits clarity on:
- Trade policy implementation
- Inflation trajectory
- Corporate profitability trends
- Private equity exit timing
Bottom Line for Business Owners
The M&A market remains fundamentally healthy, with strong buyer demand for quality businesses. However, the bar for quality has risen significantly. Companies with stable profitability, diverse customer bases, and clear growth trajectories will continue commanding premium valuations.
For those considering an exit in the next 2-3 years, now is the time to address operational weaknesses and position your business as a premium asset. The market rewards preparation, and in today’s selective environment, being merely “good enough” no longer suffices.
Key Takeaway: While the explosive growth of 2021-2022 won’t return immediately, well-prepared businesses in the right sectors can still achieve excellent outcomes. The key is understanding that today’s buyers seek quality over quantity – and positioning your business accordingly.
