Key Trends in Lower-Middle-Market M&A

Here at Shepherd Law, our primary focus is buying and selling companies in what’s commonly referred to as the “lower middle-market”. Practically speaking, this means companies ranging between $5M – $50M in annual revenue. But despite the diminutive name, to most entrepreneurs (our people) there is nothing “small” about a $50M company! And private equity (PE) adores – and is incredibly active in – this lower middle-market.

Here’s what we’re seeing:

1. Strong Interest in Add-on (Tuck-in) Deals

• Private equity firms are increasingly focusing on add-ons. These are efficient ways to build scale, especially when platform formation is constrained.
• According to KPMG, add-on deals remain a priority in 2025.

2. Dry Powder + Lower Cost of Capital

• There’s a lot of uninvested private equity capital (“dry powder”), which is pushing sponsors to deploy into LMM.
• Interest rate projections are favorable: if rates moderate as expected, financing deals in this space will become more attractive.
• Lower borrowing costs can improve cash flow metrics and make leveraged acquisitions more feasible.

3. Valuations Are Under Pressure, but Quality Commands Premiums

• According to Capstone Partners, middle-market valuation multiples pulled back slightly in 2024 (they reported average ~9.4× EV/EBITDA).
• However, buyers remain very selective. High-quality, service-oriented companies (especially in tech, healthcare, fintech) are still highly sought after.
• GF Data shows that very small lower-middle-market deals (e.g., $1 M–$25 M TEV) are still happening, but multiples are lower than for larger platforms: for H1 2025, average multipliers ranged from ~5.5× to ~6.7× EBITDA depending on size.

4. Founder / Owner-Exit Dynamics

• Many lower-middle-market businesses are founder-led or family-owned. As founders age or consider succession, there’s increasing willingness to sell.
• Some of this is strategic: buyers (PE or corporates) see fragmentation in these owner-heavy sectors as roll-up opportunities.

5. Macro & Policy Risks: Tariffs, Regulatory Uncertainty, Supply Chain

• Trade policy (tariffs) is a significant risk, especially for lower-middle-market companies with exposure to global supply chains.
• Regulatory uncertainty (tax, antitrust) is causing buyers to be cautious; due diligence is more rigorous, and closing timelines are getting longer.
• Some companies are proactively reshoring or diversifying geographic exposure to mitigate tariff risk.

6. Capital Reallocation by Larger Firms

• Some larger private equity firms are “moving down-market” into middle and lower-middle segments to deploy capital, citing less competition and attractive valuations.
• According to Termgrid, some big PE firms see the middle market as a “bright spot” amidst more challenging capital markets.

7. Exit Environment and LP Pressure

• There is pressure on PE firms to deliver exits. Some are selling larger, high-quality portfolio companies.
• Expected exit activity is pushing PE sponsors to think about liquidity events, but macro uncertainty (rates, policy) may affect timing.

8. Search Funds and Strategic Buyers

• In the lower-middle market, search funds, family offices, and strategic corporates are active, not just traditional PE. This broadens the buyer base. (Implied in multiple analyses.)
• Strategic acquirers are using LMM M&A to drive innovation (especially in tech) or carve out niche capabilities.

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Implications & Strategic Considerations

• For Sellers (Owners of Lower-Middle Businesses):
  • This could be a favorable time to consider selling, especially for well-performing, niche or recurring-revenue businesses.They should prepare for more rigorous due diligence (financial, operational, regulatory) given buyer selectivity.
  • Structuring deals: Earnouts, rollovers, or other creative structures might be leveraged to bridge valuation gaps.
  • Position the business for growth (e.g., highlighting AI-readiness, recurring revenue, scalability) to capture premium multiples.
    
• For Buyers (PE, Corporates):
  • Add-on strategy remains very attractive: buying smaller LMM companies to bolt onto platforms can generate synergies and scale.
  • Given dry powder, deploying capital into LMM could yield strong risk-adjusted returns, especially with favorable financing conditions.
  • Need to navigate macro risk: build in flexibility in financing, consider contingency plans for tariffs, and conduct robust scenario planning.
  • Talent & integration risk: smaller companies may have more owner dependence; post-acquisition integration and management transition will be critical.

If you’re a business owner who’s been approached by a buyer and contemplating a sale, give us a call. We would be happy to walk through what to except – and whether now is a good time to sell!

by Thomas M. Shepherd Esq | Dec 3, 2025 | Article