M&A Market Report: Q1 2025

The first quarter of 2025 marked a definitive shift in the U.S. lower middle market (LMM) M&A landscape. Not a collapse, nor a correction, but a recalibration. Following several years of post-COVID exuberance and 2023’s sharp reality check, the market is finding its footing in a more measured, discerning environment.

While global factors like tariffs, election-year uncertainty, and interest rate speculation continue to shape headlines, the deeper story in the LMM is behavioral: buyers and sellers are learning how to trust each other again.

Q1 2025 M&A Snapshot: A Market in Reset, Not Retreat

Q1 2025 U.S. M&A volume declined approximately 14% year-over-year. But this statistic alone belies the activity beneath the surface. Middle market deals (typically $10M–$250M) have remained more resilient, particularly in sectors with strong cash flow fundamentals and recurring revenue models.

Private equity firms continue to sit on an estimated $2.5 trillion in dry powder globally, but are deploying capital with heightened scrutiny. The average portfolio hold period has extended to 6.4 years, the highest since 2012, as buyers seek to extract more value before exiting.

Strategic buyers, meanwhile, have grown more cautious. Trade policy volatility, especially increased tariffs on imports from China and Mexico, has created cost structure uncertainty. As a result, many corporate acquirers have pulled back from platform plays in favor of small, accretive add-ons.

An Evolving Balance Between Buyers and Sellers

The current market is not defined by leverage, it's defined by alignment. Strong businesses still command premium outcomes, but buyers are no longer willing to overlook operational “hair” to chase growth narratives.

In this market:

• Valuation discipline is no longer negotiable. Multiples are compressing across most industries, with premium assets still achieving high-teens EBITDA multiples, but only when backed by clean financials, low customer concentration, and stable leadership.

• Buyer skepticism is real. Firms burned by 2021–2022 overpays are leaning conservative, evaluating deals with a risk-adjusted lens. Strategic buyers are increasingly pushing back on aggressive adjustments, inflated projections, and non-recurring add-backs.

• Seller readiness is more important than ever. Many LMM business owners enjoy strong cash flow and lifestyle perks; high salaries, tax efficiency, and control. Without a meaningful cash-at-close component, many simply have no compelling reason to sell.

From Information Gaps to Mutual Clarity

One of the most encouraging trends in Q1 has been the narrowing of the information asymmetry that historically defined buyer-seller dynamics.

Sellers are more educated, entering the market with a clear understanding of value drivers and process mechanics. They care deeply about valuation, but also about cultural alignment, employee legacy, and the future of their customer relationships. These aren’t negotiation tactics, they’re deal-breakers.

Buyers, in turn, are learning that winning a deal isn’t just about writing the biggest check. It’s about positioning themselves as a worthy steward of the seller’s life’s work with a strategic vision that makes sense, not just for the investment committee, but for the founder walking away.

This emerging clarity between parties hasn’t eliminated friction but it has elevated the conversation.

The Role of Intermediaries: Facilitators of Trust, Not Just Price

Intermediaries in Q1 2025 aren’t simply playing matchmaker, they are structuring visibility.

• For sellers, a well-run process delivers not just multiple options, but context- enabling decisions made from a position of strength, not hope.

• For buyers, access to curated, qualified opportunities saves time and focuses resources on the right pursuits. Especially for PE groups with fund deployment timelines and lean sourcing teams, this clarity is critical.

While competitive bidding processes still frustrate some buyers, most recognize them as standard. What matters more is the quality of communication, transparency of process, and the authenticity with which each party approaches the deal.

What Comes Next

2025 is shaping up to be a high-volume, high-variance year. More deals are coming to market but fewer will close without structure, intentionality, and fit. Sellers hoping to replicate 2021 outcomes may sit on the sidelines. Buyers hoping for distressed-level bargains on healthy businesses will likely walk away empty-handed.

But for those who adjust their expectations, lead with clarity, and pursue alignment over aggression there are still excellent deals to be done.

Not a Market of Fear, A Market of Filtering

This isn’t a buyer’s market or a seller’s market. It’s a filtering market. One where timing, intent, preparation, and fit matter more than ever.

Deal volume may ebb and flow, but the fundamentals remain: great businesses will transact, strong relationships will win, and the M&A process, when approached with honesty and strategy, will continue to reward those who treat it with the seriousness it deserves.