As this year comes to a close, I have been reflecting on what really happened in the lower middle market of companies generating between $10 and $250 million in revenue.
The first thing to say is that fewer businesses sold this year. Transaction volume slowed meaningfully compared to prior years, and each quarter felt a little lighter than the one before it. This was not because owners suddenly stopped caring about liquidity or because buyers disappeared. It was because higher interest rates changed the math of transactions and forced everyone to slow down. Buyers took longer to decide, and lenders took longer to get comfortable.
What is important, though, is that a slower market did not turn into a weak market. Even with fewer transactions getting done, valuations held up better than many expected. Over the course of the year, average valuations remained steady. Valuations dipped in the middle of the year and then recovered again as buyers focused their capital on stronger opportunities. Buyers did not lose faith in good businesses, they became more selective about which businesses deserved strong pricing and which ones did not.
One of the clearest themes this year was that size mattered more than it used to. Larger companies consistently commanded higher multiples than smaller ones, and that gap widened as the year progressed. Businesses with enough scale to absorb volatility, support debt, and generate steady cash flow were rewarded by both buyers and lenders. Smaller businesses could still sell, but buyers pushed harder on structure, risk sharing, and price. This was less about quality and more about financing reality.
Another notable shift was how little extra buyers were willing to pay for perfection. Historically, companies with strong growth and clean margins received a meaningful premium. This year, that premium nearly disappeared. Buyers were less interested in best case stories and more focused on durability. They wanted to know whether a business could keep performing even if conditions softened.
Leverage trends told the same story. Debt levels declined gradually throughout the year. Not suddenly and not out of fear, but steadily. Senior lenders became more cautious, especially with smaller companies, and required buyers to contribute more equity. Financing was still available, but it was structured more conservatively. That shift changed negotiations, valuations, and expectations on both sides of the table.
Borrowing costs remained elevated. Senior debt became slightly more expensive again toward the end of the year, while subordinated debt stayed expensive the entire time. That kind of capital structure places real pressure on a business. Buyers know this, which is why they focused so heavily on free cash flow.
Industry performance followed familiar patterns. Manufacturing held up better than many expected, supported by tangible assets and long operating histories. Business services faced more scrutiny because lenders worry about people risk and contract durability. Healthcare remained strong due to steady demand. Distribution stayed relatively stable. Preferences were clear, even if no single industry dominated.
Add-on acquisitions remained active. Even in a slower year, buyers continued to grow by acquiring smaller businesses and integrating them into existing platforms. In many cases, it felt safer to build on something stable than to risk launching a new platform investment.
When you step back and look at all of this together, the story of the year becomes simpler. Buyers became more disciplined, and lenders became more selective. Sellers who succeeded were realistic, prepared, and patient. The transactions that closed were thoughtful, well-structured, and focused on long-term value rather than quick exits.
For owners quietly considering a sale in the next one to three years, this market is sending a clear message. It rewards preparation, and it punishes wishful thinking.
Owners who take the time now to understand their cash flow, clean up financial reporting, and get honest about what is recurring and what is not will be in a much stronger position later. Buyers today do not want surprises. They want businesses that are understandable, predictable, and resilient, even if growth is modest rather than explosive.
This market also rewards flexibility and realism around transaction structure and terms. Strong outcomes come from sellers who understand how financing works today and are willing to think creatively about transition, seller financing, or longer involvement when it makes sense. Owners who insist on yesterday’s terms often end up waiting longer than they planned.
What this market punishes is inconsistency. It punishes messy books, unexplained swings in earnings, and businesses that depend too heavily on one customer or one person. It also punishes the belief that emotional attachment alone creates value. Buyers respect what you built, but they pay for what they can clearly understand and confidently finance.
For owners who are thinking ahead, the greatest advantage right now is time. Time to strengthen the team so the business does not rely on you every day. Time to stabilize cash flow. Time to decide what role you want to play after a transaction, rather than being forced into decisions under pressure. Those are the owners who remain in control regardless of whether the market feels hot or cold when they eventually go to market.
If this year reinforced anything for me, it is that good businesses still sell well. But they sell best when they are prepared quietly, early, and with discipline, long before anyone else knows the owner is thinking about selling.
Subscribe to our Newsletter
Sign up for the latest industry insights from True North Mergers & Acquisitions.
