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The middle market M&A landscape is changing. New stability may create opportunities for sellers who understtwo and current dynamics and act strategically. This week, we’re looking at ways sellers can build negotiating leverage going into the new year. Of course, the outcomes of any transaction are contingent on market conditions and a range of other uncontrollable externalities, but even so, a well-prepared seller is more readily capable of nudging conversations toward their desired result.
Market signals suggest a potential turnaround may be underway. Deal flow for strong companies appears to be bouncing back, with the average pace for 2025 reportedly running 8 percent the previous five-year average. While past performance does not guarantee future results, such indicators may suggest momentum in deal activity.
The capital situation presents potentially favorable conditions. According to available estimates, global private equity dry powder sits at approximately $1.2 trillion by late 2025, with nearly a quarter of that capital reportedly held for over four years. While such capital availability could theoretically increase competitive pressure on sellers' behalf, actual outcomes depend on numerous factors, including market conditions, deal quality, and buyer strategy.
These conditions may benefit sellers, but only those who can skillfully navigate the environment will gain a true strategic advantage. Outcomes will vary by company, industry, and the broader economy. But if you're considering a sale, understanding where you stand in relation to these market dynamics is a critical first step, and one worth taking with expert M&A guidance.
Competitive tension between multiple qualified buyers could potentially strengthen a seller's negotiating position. While there are no guarantees in any M&A process, market theory suggests that multiple serious bidders may help drive valuations and provide sellers with more negotiating flexibility on non-price terms.
The buyer landscape includes private equity, strategic buyers, and family offices and first-time buyers. This diversity of buyer types could mean that sellers are not limited solely to traditional PE playbooks. Different buyer types may have different priorities regarding synergies, return expectations, and post-acquisition operations.
In theory, competitive processes create dynamics where buyers may feel motivated to improve terms and accelerate decision-making to remain competitive. However, actual results depend on buyer interest, deal quality, market conditions, and numerous other variables.
According to recent analysis, add-on acquisitions are expected to dominate PE activity in 2026, with speed predicted to be a differentiator. If accurate, such dynamics could theoretically allow sellers who can demonstrate readiness to close to extract concessions. However, these are forward-looking predictions subject to market change.
A fundamental principle in M&A is that transaction quality often matters as much as deal size. Sellers may benefit from evaluating potential buyers on criteria beyond offer price: the buyer's ability to close, operational integration capability, capital certainty, and alignment with the seller's vision for the business and employees.
Market data suggests conditions that may support a selective approach. Credit conditions are expected to improve but underwriting to remain relatively tight, with expectations including tighter covenants, interest floors, and equity-heavy structures. While these conditions could theoretically filter out less-capitalized buyers, leaving more serious bidders, actual capital availability and buyer quality will depend on market evolution.
Independent sponsors and family offices are expanding as competitive buyer group for founder-led businesses. For founder-led or founder-adjacent companies, such alternative buyers may offer different perspectives on post-sale founder roles, earnout structures, and non-compete terms. However, suitability varies by situation.
Disciplined buyer selection can help shape negotiation dynamics, as negotiating with genuinely interested parties may produce different results than negotiating with exploratory buyers. However, outcomes remain dependent on deal specifics and broader market conditions.
While price represents the most straightforward negotiation point, the full scope of middle market transactions encompasses many variables: earnout structures, representation and warranty insurance terms, seller financing, non-compete covenants, founder roles, management retention incentives, customer and employee protections, and integration timeline. These elements, in aggregate, can significantly impact the seller's overall outcomes.
Earnouts and representation and warranty insurance (RWI) are standard tools in the lower middle market. Earnouts and RWI requirements may signal buyer concerns about post-close performance or disclosure completeness. Understanding buyer motivations for these structures can inform negotiation strategy. Sellers may have opportunities to propose alternatives, such as modified earnout periods, adjusted targets, or adjusted clawback provisions, though buyer willingness to negotiate such terms varies.
RWI similarly may indicate where buyer concerns lie. Requests for extensive RWI coverage could reflect buyer uncertainty about disclosure or due diligence, or simply risk-averse buyer preferences. Sellers may explore negotiating points such as who retains coverage, applicable thresholds, or cost allocation, though such negotiations remain subject to buyer receptiveness.
When buyers have significant capital and deployment pressures, they may demonstrate greater flexibility on structure than on headline price. A buyer with limited price movement might offer more flexibility on earnout terms, non-compete duration, or founder retention packages, especially if such flexibility increases buyer confidence in deal success. However, this dynamic is not guaranteed and will depend on individual buyer circumstances.
The relationship between having leverage and using it effectively requires discipline and clear thinking.
Business owners have identified legitimate concerns regarding market conditions. According to available survey data, 92.5% of surveyed CEOs ranked inflation as their top growth concern, and 82% of CEOs cited interest rates as their second-most growth concern.
These concerns reflect real business challenges and risks. However, business concerns can sometimes lead sellers to accelerate timelines or accept suboptimal terms. The same economic uncertainties that concern owners may also create buyer urgency to acquire quality assets before opportunity sets narrow. Sellers who can distinguish between their legitimate business anxieties and their transaction negotiating strategy may be better positioned to make deliberate choices about process timing and term acceptance.
Rather than allowing business concerns to drive process decisions, sellers might consider whether those same concerns actually support a more disciplined, thorough approach: one that allows time for competitive processes and thoughtful buyer selection. This remains a judgment call that depends on individual business circumstances and risk tolerance.
Based on current market observations, sellers might consider:
Run a competitive process with qualified buyers. Multiple serious bidders could theoretically create competitive tension, though outcomes depend on genuine buyer interest and deal quality. This is potentially the most powerful tool available, but effectiveness depends on buyer caliber and true interest.
Be selective about your buyer list. Quality may outweigh quantity. Buyers with genuine execution capability and alignment with your vision may produce more productive negotiations than exploratory buyers. However, buyer selection requires an accurate assessment of fit and capability.
Understand buyer concerns and hedging requests. RWI requirements, earnout structures, and seller financing requests may signal where buyers see risk. Understanding motivations creates potential negotiation opportunities, though buyer flexibility on these items is not guaranteed.
Know your actual priorities beyond price. Clarity on what matters most (founder role, management continuity, customer treatment, non-compete length, integration pace, etc.) can help focus negotiations. However, achieving all priorities is not always possible; tradeoffs are common.
Allow market conditions to create natural leverage. Market conditions favorable to sellers may create buyer flexibility without requiring aggressive seller tactics. However, such leverage only materializes if you maintain a disciplined process and don't prematurely close discussions.
You only get one shot at your desired outcome when you sell a company. Getting the results you want can depend less on market timing and more on discipline. Market conditions are subject to change, individual results will vary based on deal-specific factors, and no transaction outcome is guaranteed. But your ability to prepare your offering is in your hands.
If you're considering selling your business or would like to discuss your leverage strategy in today's market, please schedule a call or contact our team. Our experienced advisors can help you navigate the complexities of the M&A process and position you for the best possible outcome.