The M&A market is experiencing a significant split, with large-cap dealmaking surging in the first half of 2025 while transactions in the lower middle market continue a multi-year decline, according to the Middle Market Q2 M&A Update from investment bank Mufson Howe Hunter.

Why it matters: The divergence creates two distinct realities for dealmakers. Large corporate buyers and private equity sponsors are leveraging massive liquidity to chase scale, while smaller players face tighter credit, valuation gaps, and increased scrutiny.

The big picture: The slowdown in the lower middle market is not a new phenomenon. M&A transactions below $250 million in enterprise value fell 12% in the first half of 2025, extending a three-year downturn.

  • Deal volume in this segment has fallen 54% from its peak in 2021, dropping from approximately 2,800 transactions to just 1,300 in 2024, with the trend continuing this year.
By the numbers: In contrast, transactions exceeding $1 billion saw a 44% year-over-year increase in volume, with the total dollar value of these deals nearly doubling.

  • The report attributes the large-deal boom to corporate buyers deploying significant cash reserves and PE sponsors armed with over $1 trillion in dry powder.
  • Valuation multiples in the lower market have recovered slightly but remain below 2021 highs. Deals in the $0-25 million range saw an average multiple of 6.8x EBITDA in the last twelve months, compared to 7.3x in 2021.
Zoom in: Several factors are contributing to the contraction at the lower end of the market, according to the report.

  • The traditional senior lending market has tightened, and private credit funds are showing more caution, demanding larger equity contributions from buyers.
  • This has created a "bid-ask gap," as buyers' ability to pay is constrained while sellers have been slow to adjust their valuation expectations downward.
Between the lines: Buyers have become highly selective, extending due diligence timelines and intensifying their focus on specific business attributes.

  • Acquirers are prioritizing companies with recurring revenue, strong EBITDA margins, high single-digit organic growth, and limited exposure to tariffs and supply chain disruptions.
  • This has increased demand for B2B and B2C services businesses, while consumer-facing and manufacturing companies face more scrutiny.
  • Due diligence has also expanded beyond financials to include deep dives into cybersecurity, technology infrastructure, and supply chain risks, with a comprehensive Quality of Earnings (QoE) report now considered standard.
What to watch: Despite the challenges, Mufson Howe Hunter remains "guardedly optimistic" for the second half of 2025.

  • Structural forces, including the "silver tsunami" of retiring business owners and a backlog of PE-owned companies seeking exits, are expected to continue driving deal flow.
  • The report advises that sellers who properly prepare for a transaction—through third-party QoE reviews and aligning with current market realities—will be best positioned for a successful exit.

The Middle Market Q2 M&A Update can be viewed here.

SOURCE: Mufson Howe Hunter

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