Based on a recent report from GF Data, the volume of middle market M&A transactions through Q3 was down roughly 27% compared to the first nine months of 2024. The slowdown reflects both the mid-year pause in closings due to tariff uncertainty and continued caution among buyers navigating high financing costs and uneven deal quality.
That said, we believe 2026 is shaping up to be a pivotal year for middle market M&A transactions. As financing conditions stabilize and valuation gaps narrow, activity in the middle market is expected to accelerate. Recent industry surveys and direct touch points with potential transaction participants indicate that private equity, independent sponsors and strategic buyers all anticipate increased deal flow in the coming year, setting the stage for a broad-based rebound.
Rates & Credit: A Supportive Backdrop
Interest rates and credit markets are expected to provide a more predictable, supportive environment in 2026. That should make leveraged buyouts and recapitalizations more accessible for middle market buyers. Direct lenders remain active, offering flexible options across the capital structure. In addition, the continued growth of private credit suggests that independent sponsor-backed transactions will have ample financing capacity in the year ahead.
Dry Powder & the Urgency to Deploy
Private capital reserves have continued to grow, and with much of this capital now several years old, there is increasing pressure to put funds to work. As M&A markets recover, better quality deals come to market, and valuation gaps between buyers and sellers continue to narrow, private equity firms stand ready to – and need to – deploy capital for both platform companies and add-on acquisitions.
Creative Deal Structures Remain Prevalent
Earnouts, seller notes, and rollover equity have become common tools to bridge valuation gaps between buyers and sellers. These structures are expected to remain common in 2026, but it’s important to approach them with care. Recent data shows that the number of deals containing earnouts have increased, likely in response to valuation gaps, but only a small portion of potential earnouts are typically realized, which can lead to disputes if terms are not clearly defined.
Buy-&-Build Strategies Continue
With financing available and valuation gaps narrowing, add-on acquisitions are likely to remain central to private equity strategies in 2026. Recent data shows that add-ons continue to make up an increasing portion of deal activity, and this trend is expected to persist as both private equity and strategic buyers continue to lean on acquisition strategies as opposed to organic growth to build value.
Sector Dynamics: Quality Assets Stand Out
Technology, especially software that enables AI, healthcare services, and B2B services are expected to lead deal flow in the middle market due to their stable cash flows and fragmented landscapes. Sectors sensitive to tariffs or supply chain disruptions may continue to face wider valuation gaps and require more thorough diligence.
Valuations: Fundamentals First
Valuations in the middle market are expected to remain steady, with value creation driven primarily by earnings growth rather than multiple expansion. The narrowing of valuation gaps between buyers and sellers, as well as stable (or declining) interest rates and improved credit access, should help facilitate and support dealmaking in 2026.
What Successful Sellers & Buyers Should Do Now
Sellers and buyers should begin preparing at least 36 months of clean, normalized monthly financials, commission a Quality of Earnings (QoE) report early, and expand diligence to include technology, cybersecurity, and AI utilization. These are areas that buyers will likely scrutinize for resilience and scalability in the coming year. Engaging an experienced M&A advisor such as The Bonadio Group for transaction advisory services and cybersecurity and IT diligence can add significant value to the planning phase of an M&A transaction and help position sellers for a more successful exit.
Bottom Line
With rates easing, private credit deepening, and capital ready to be deployed, 2026 is poised for a significant rebound in middle market M&A transactions. The focus will be on quality assets, thoughtful deal structures, and disciplined integration, setting the stage for a fundamentals-driven recovery.
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
