Lower middle market deals — typically $10M–$250M enterprise value — remain attractive, but success hinges on strategic execution.
As 2025 closes, private equity firms experiencing a market rewarding discipline and creativity. Lower middle market (LMM) deals — typically $10M–$250M enterprise value — remain attractive, but success in 2026 hinges on strategic execution.
Explore CLA’s top five predictions for private equity buyers in the year ahead.
1. Add on acquisitions will dominate — and speed will win
Buy and build strategies will continue to outperform platform launches. Expect add ons to represent most PE activity in 2026 as firms seek synergies, geographic expansion, and cost efficiencies. Integration readiness and a clear 100 day plan will differentiate winners.
Action for PE: Pre wire diligence and integration playbooks to accelerate IOI to LOI timelines.
2. Credit conditions improve but underwriting stays tight
Interest rates are easing modestly, but lenders remain selective. Senior debt will be available for quality assets, yet expect tighter covenants, interest floors, and equity-heavy structures.
Action for PE: Build flexible capital stacks — combine senior debt with mezzanine or private credit and leverage seller rollover to bridge valuation gaps.
3. Valuation discipline persists — quality commands premium
Multiples rebounded in late 2025, but the gap between top-tier and average assets remains wide. Businesses with strong margins, recurring revenue, and tariff resilience may earn premium pricing.
Action for PE: Target sectors with predictable cash flow and margin strength — business services, health care, and tech-enabled platforms — remain attractive.
4. Smarter deal structures: Earnouts and RWI go mainstream
Earnouts and representation and warranty insurance (RWI) are now standard tools in the LMM. These structures help bridge valuation gaps and deliver cleaner exits.
Action for PE: Use RWI to reduce escrow and strengthen bids; draft earnouts with precision to avoid post-close disputes.
5. Independent sponsors and family offices expand competition
Independent sponsors have matured and now compete aggressively for founder-led businesses. Many bring sector experience and flexible structures resonating with sellers.
Action for PE: Differentiate with speed, specialization, and cultural alignment. Generalist approaches will struggle in competitive processes.
What’s different about 2026?
- Two-speed market: Large-cap deals rebound, but LMM remains selective and relationship-driven.
- Dry powder pressure: Aging capital increases urgency, but underwriting discipline holds.
- Sector focus: Health care services, tech-enabled B2B, and business services lead; manufacturing and consumer require tighter theses.
How CLA can help private equity buyers
At CLA, we understand the nuances of lower middle market transactions. Our integrated team delivers:
- Buy-Side Quality of Earnings (QoE): Fast, actionable insights to support confident bidding.
- Integration planning: 100-day playbooks aligned with your value creation thesis.
- Tax structuring and modeling: Analyze after-tax returns and mitigate risk.
- Transaction advisory and RWI support: Navigate deal structures and insurance options seamlessly.
- Industry intelligence: Proprietary data and sector insights to sharpen your investment thesis.
Connect with CLA’s private equity team today to discuss opportunities and strategies tailored to your portfolio goals.