After a year of market choppiness in 2025, the M&A environment for lower-middle-market businesses is shifting toward stability. For owners of companies with annual revenue between $20 million and $200 million, the instability of early 2025, driven by tariff fluctuations and valuation gaps, initially slowed deal activity more than anticipated. However, as conditions stabilized in the latter half of the year, a positive outlook emerged for increased activity in 2026.
Walden M&A President John Phillips and Principal AJ Alexander recently shared their perspectives on the forces shaping this new environment and what it means for founders looking to maximize value.
Deal Flow Fueled by “Dry Powder”
The expectation for higher deal velocity in 2026 is driven by a massive buildup of unspent capital, often referred to as “dry powder”. By late 2025, global private equity dry powder hit approximately $1.2 trillion, with nearly a quarter of that capital held for over four years.
“As we start 2026, I see an atmosphere of optimism,” Phillips noted. “The changes of 2025 with tariffs slowed down what was expected to be a momentum year, but by the third quarter, activity picked up on both the buy-side and the sell-side.”
This buildup creates significant pressure on fund managers to deploy capital. Alexander explains that this capital is a primary catalyst for the year ahead: “PE firms have a lot of this capital to deploy. I think there’s going to be an environment that encourages more progress and more velocity.”
Private Equity’s Refined Focus and Stable Valuations
Private equity remains a dominant force, typically accounting for 40% to 60% of annual middle-market transactions. However, the strategic focus for these acquisitions is evolving beyond high-growth technology.
PE firms have long invested in business services and industrials, but the post-2022 environment has increased the focus on resilient cash-flow sectors and operational value creation. Industrials have typically comprised a majority of their investments, but technology investments have grown from 19% to 22% of deals, thanks to a growing focus on infrastructure to support booming areas such as AI and data centers.
Phillips anticipates that this steady demand, combined with easing financing conditions, will lead to stable valuations in the coming year. “With lower interest rates, more buyers will likely enter the market. While we may not see the peak multiples of 2021, I expect stable multiples in 2026 that are comparable with the strong finish of 2025.”
Related Article: Why Private Equity is Eyeing Middle Market Businesses
Domestic Manufacturing and Industrial Automation
The uncertainty surrounding international supply chains in 2025 has turned domestic manufacturing into a prime M&A driver. Corporations are increasingly looking to expand their U.S. footprint to mitigate trade-related risks.
Beyond traditional manufacturing, industrial automation is poised for significant activity. Engineering firms in this space possess irreplaceable domain expertise in high demand as companies seek to modernize operations and address labor constraints.
Positioning for a Successful 2026 Exit
With buyer selectivity remaining high, achieving a premium valuation hinges on presenting a business that can thrive post-acquisition. To maintain deal momentum, Walden M&A recommends focusing on three core pillars:
- Operational Independence: Developing a middle management team so the business does not rely solely on the founder.
- Financial Rigor: Utilizing a Quality of Earnings (QoE) report to verify financials and build buyer trust before going to market.
- Customer Diversification: Reducing the risk associated with relying on only a few major clients to ensure recurring, stable revenue.
Walden M&A’s collaborative, team-based approach is designed to guide owners through these complexities. “The best deals don’t really happen in silos,” Alexander explained. “It’s about partnering with a firm that brings collective experience to the table.”
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