Current Trends in the Lower Middle Market M&A Landscape: Q2 2025 Insights
The second quarter of 2025 delivered a complex but largely encouraging picture for lower middle market mergers and acquisitions (M&A). Sellers are finding favorable conditions, private equity remains aggressive, and main street entrepreneurial activity continues to expand. At the same time, looming headwinds in credit markets and employment data underscore that the market is not without risk.
Below, I’ve unpacked the major themes shaping the lower middle market M&A environment for the second half of 2025.
A Tale of Two Economies: Services vs. Manufacturing
The U.S. economy, despite tariff-driven uncertainty, proved resilient through Q2. Services remain the standout performer, with the ISM Services Purchasing Managers Index (PMI) consistently above 50—an indicator of ongoing expansion. Manufacturing, by contrast, continues to struggle below the 50 mark but showed signs of stabilizing in June.
The manufacturing sector’s outlook hinges heavily on policy stability. Executives are expressing a clear desire for regulatory and trade clarity—knowing the rules of the game will allow them to adjust operations and move forward. Encouragingly, recent tax incentives targeted at reshoring U.S. manufacturing could create medium-term opportunities, though the immediate headwinds of labor shortages and immigration restrictions remain real.
For M&A participants, this bifurcation is critical. Acquirers remain active in manufacturing despite the noise, but services-driven companies continue to draw the highest valuations.
Employment Data: A Closer Look
The labor market continues to be a central variable shaping deal sentiment. While monthly jobs reports suggest steady employment, the more comprehensive Quarterly Census of Employment and Wages (QCEW) paints a less robust picture.
Key insights from the most recent QCEW release include:
- Annual job growth for 2024 came in at just 8%, far lower than initially reported.
- Long-term unemployment ticked upward, now at 6 million individuals.
- Job gains were highly concentrated in government and education, rather than broad-based private sector expansion.
For business owners considering a transaction, this suggests that wage pressures and talent shortages may persist in some industries while broader economic growth remains uneven. For buyers, it reinforces the need for thorough due diligence on labor availability and costs in any target sector.
Clouds on the Horizon: Credit Defaults Rising
One of the most concerning developments of Q2 was a noticeable uptick in credit delinquency rates. According to Federal Reserve data analyzed in July, both consumer and business loan delinquency rates reached their highest levels since 2016.
Several factors are driving this:
- Rising defaults in student loans, with more than 25% of borrowers now delinquent.
- Increasing consumer credit stress, creating challenges for consumer-facing businesses.
- Banks beginning to provision for higher loan losses, which could dampen lending capacity.
For M&A dealmakers, tightening credit markets could affect both leverage availability and acquisition appetite. While private equity firms still sit on record levels of “dry powder,” financing conditions are likely to play a larger role in shaping deal structures in the coming quarters.
Private Equity: Full Steam Ahead
Despite these clouds, private equity activity continues at a brisk pace. Q2 saw a slight dip in transaction counts compared to Q1, but overall activity is still on track to surpass 2024, which was already a relatively subdued year.
Competition among buyers is intense. In many cases, sellers of quality lower middle market companies are fielding 10 or more offers, underscoring the imbalance between supply and demand. For owners considering an exit, this represents an exceptionally favorable environment, provided their businesses are well-prepared for sale.
Main Street Confidence: SBA Lending Surge
Entrepreneurial activity on main street remains robust, as reflected in record-breaking Small Business Administration (SBA) 7a loan originations. Within the first nine months of the SBA fiscal year, both transaction count and total loan value have already surpassed 2024 levels.
This trend points to several dynamics:
- Entrepreneurs remain optimistic about acquiring businesses, even amid macroeconomic uncertainty.
- Market volatility and tightening credit channels have pushed more buyers toward SBA-backed loans.
- Recent changes in SBA lending rules may have accelerated activity in Q2, though the underlying trend remains upward.
For sellers of smaller lower middle market companies, this is particularly encouraging, as SBA-backed financing often plays a critical role in enabling transactions.
Sector Focus: Private Equity Strategies Evolving
Finally, sector concentration trends among private equity firms provide valuable insight into where capital is flowing. While the report notes robust activity in favored verticals such as services and technology, caution is emerging in consumer discretionary sectors, particularly those exposed to credit-sensitive households.
Business owners preparing for an eventual exit should pay close attention to these shifts. Positioning a company as scalable, resilient, and aligned with favored sectors can make a substantial difference in valuation and buyer interest.
Conclusion: Opportunities Amid Uncertainty
The Q2 2025 lower middle market M&A landscape is defined by contrasts. Sellers are operating in a strong environment, with abundant demand from both private equity and main street buyers. Buyers, meanwhile, face a competitive, supply-constrained market where proprietary deal flow strategies are critical.
At the same time, credit market stress and uneven job growth serve as reminders that macroeconomic risks remain in play. Business owners and advisors should view the current window as a favorable opportunity to initiate or accelerate exit planning—while being mindful of sector positioning and financing dynamics.
My recommendation to business owners is clear: for those considering a sale in the near to medium term, Q2’s data reinforces that now may be the right time to engage.
