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Even as winter settles in, the M&A market is finally starting to thaw.
2025 opened with hesitation baked into every corner of the lower middle market. Deals were getting done, but only for companies that had cleared an unusually high readiness bar. Buyers had record levels of capital yet approached each transaction as if the downside risk outweighed the upside.
By our own assessment, it was a “market of choice, not chance”. Private equity was sitting on roughly $2.62 trillion in dry powder, but deploying it slowly and selectively. Global PE and venture deal value rose nearly 19% in the first half of the year, up from roughly $325.6 billion in H1 2024 to $386.4 billion in H1 2025, even as global deal volume fell 6%. U.S. deals over $100 million followed the same pattern: volume down ~5%, value up more than 6%). Sellers weren’t preparing for competition—they were preparing for an audit.
And then, in the span of a few months, the market flipped.
First, two Federal Reserve rate cuts in September and October pushed the target range down to 3.75%–4.00%, with expectations of another cut to 3.50%–3.75% by year-end (Federal Reserve, CNBC). JD Supra called these cuts a “much-needed bright spot” for M&A; Lending conditions loosened while the broadly syndicated loan market reopened.
At the same time, private equity hit an internal deadline: funds raised in 2020–2021 were nearing the end of their investment windows, increasing pressure to deploy capital (CrowdStreet). Deal volume began to rise again. Structuring became more flexible. Earnouts helped bridge the valuation gap (JD Supra). The market that spent the summer rewarding discipline and documentation entered winter rewarding timing.
As the year closes, the lower middle market finally feels like it is moving again, but sellers are not celebrating. Instead, they find themselves confronting several simultaneous realities.
1. The window is open, but it may not stay that way. The Federal Reserve cut rates in September and October 2025, lowering the target range to 3.75 to 4.00 percent, with expectations of another cut to 3.50 to 3.75 percent by year's end. Sellers know this shift in borrowing costs could continue to support activity into early 2026 or reverse the moment another macro pressure surfaces.
2. Buyers are moving faster, yet diligence standards have not loosened. Direct lenders have become highly active, and the broadly syndicated loan market, which had been quiet earlier in the year, has reopened (Portgage Point Partners). But despite these tailwinds, buyers continue to demand the same rigor.
3. Structures are back on the table, and sellers must decide what they are willing to accept. Earnouts and rollover equity are being used to bridge the valuation gap that characterized mid-2025. JD Supra notes the increased use of earnouts, seller notes, and equity rollovers to close deals. Sellers must now determine not whether to accept structure, but how much of the deal they are willing to tie to future performance.
4. Tax timing is now part of the decision. TCJA individual rate provisions, including capital gains treatment, expire on December 31, 2025, which could raise effective tax burdens for sellers in 2026 (Tax Foundation). Many owners are already accelerating their timelines to avoid potentially higher taxes.
5. The fear has shifted. Earlier in the year, owners feared what would happen if the market got worse. Now the fear is missing the moment. Sellers who spent 2025 preparing through upgrades to reporting, operations, and legal documentation, may now find themselves in the strongest position all year. Their central question is pragmatic: if the market is rewarding timing and they are finally ready, why wait?
As 2025 ends, the lower middle market is more active than it has been all year. Rate cuts, renewed lender participation, and private equity deployment deadlines have pushed deal volume upward. Buyers are moving faster, and financing conditions are materially better than they were in mid-year.
Even so, the pressures that constrained activity earlier remain visible. Tariff effects persist in certain industries, valuation gaps still appear when earnings quality is uneven, and diligence expectations have not relaxed. Selectivity continues to define buyer behavior.
Looking forward, the first half of 2026 could stay busy if financing conditions remain supportive. Continued monetary easing, steady credit markets, and private equity’s need to deploy capital would all reinforce current momentum. But the market is sensitive to macro shifts, including rate timing, credit conditions, and the impact of the TCJA provision expirations.
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If any of these trends raise questions for your business, or if you’d like to explore what they mean for your exit strategy, feel free to reach out to us. We’re happy to share insights and help you think through options.