Mergers and acquisitions in the lower middle market (LMM) continue to evolve, shaped by demographic shifts, capital availability, and buyer expectations. Attorney Ken Charette, chair of FLB’s Mergers & Acquisitions practice, took part in a panel discussion, which provided legal, advisory, and financial perspectives on today’s market conditions, as well as steps business owners should take when preparing for a sale. Check out this summary of this conversation (and fill out the form at the bottom for a free download of the entire recorded webinar).
Current M&A Trends: A Strong but Cautious Market
In 2025, deal activity in the lower middle market remained robust. Private equity firms continued to deploy significant capital, often through roll‑up strategies that consolidated complementary businesses to drive scale and profitability. At the same time, demographic forces, notably the “silver tsunami” of retiring baby‑boomer owners, created a steady pipeline of quality companies coming to market.
What about interest rates? While many buyers in this segment fund deals directly from their balance sheets, bank financing still influences valuations and deal appetite. Expected rate declines could further stimulate activity through 2028.
One recent notable shift: buyers are more cautious. They are conducting deeper due diligence and increasingly relying on deferred purchase mechanisms such as earnouts to bridge valuation gaps and mitigate risk.
The Deal Timeline: Preparation Is Everything
A typical M&A process spans six to nine months, moving through preparation, marketing, LOI negotiation, diligence, closing, and post‑closing transition, with preparation being the single most important factor in achieving a smooth process and strong valuation.
Owners who begin planning one to three years before a sale have more options: financial, tax‑related, operational, and personal. Early preparation allows advisors to identify issues, strengthen financial reporting, and position the business in the most compelling way for buyers.
LOI Stage: Setting the Foundation for a Successful Deal
Before a buyer submits a Letter of Intent (LOI), they typically receive a confidential information memorandum (CIM) and preliminary financials. Investment bankers play a central role here, crafting a narrative that highlights the company’s strengths, growth opportunities, and market position.
Once a LOI is on the table, the tone of negotiations becomes clearer. Even the NDA stage can foreshadow how a buyer will behave later, whether they are collaborative or overly aggressive. Sellers should remember that signing an NDA does not obligate them to disclose everything immediately; information can be released in stages as trust builds.
Quality of Earnings: The Financial Backbone of the Deal
A Quality of Earnings (QoE) analysis is one of the most critical components of preparation. Buyers rely on QoE reports to validate the company’s true cash‑flow‑generating ability, and sellers increasingly commission their own “sell‑side QoE” to get ahead of issues.
A QoE typically:
- Reconciles reported EBITDA to a normalized, adjusted EBITDA
- Identifies non‑recurring, discretionary, or personal expenses
- Highlights related‑party transactions
- Evaluates customer concentration, revenue quality, and margin trends
- Assesses whether monthly financials reflect year‑end adjustments
A strong QoE package accelerates diligence, builds buyer confidence, and often improves valuation.
Tax & Estate Planning: Start Early, Not After the LOI
Another top tip to keep in mind is do not wait until a deal is underway to think about tax and estate planning.
Early planning may include:
- Updating wills and trusts
- Gifting or transferring ownership interests
- Reviewing shareholder or operating agreements
- Identifying required consents for a future sale
- Evaluating entity structure for tax efficiency
Once an LOI is signed, many planning opportunities disappear. Starting early ensures owners can maximize after‑tax proceeds and align the transaction with long‑term family goals.
Employee Transitions: Protecting the People Who Built the Business
For many owners, ensuring key employees are taken care of ranks as high as maximizing valuation. Buyers also value stability; retaining key personnel reduces risk and supports continuity.
Common tools include:
- Stay bonuses or change‑of‑control bonuses
- Phantom equity or profit‑sharing arrangements
- New employment agreements
- Opportunities for equity in the buyer’s organization
When addressed early, these strategies help align interests, strengthen the company’s story, and often increase purchase price.
The Human Side: Life After the Sale
Beyond the financial and operational considerations, owners should reflect on their personal goals. Many have spent decades building their companies, and the transition can be emotional. Whether the next chapter involves travel, family time, philanthropy, or new ventures, clarity on post‑sale life helps guide decisions throughout the process.
Selling a business is one of the most significant financial and personal decisions an owner will ever make. The most successful outcomes come from early preparation, a strong advisory team, and a thoughtful approach to both the numbers and the people involved.
In today’s active but increasingly cautious market, readiness and strategy are more important than ever.
M&A opportunities are complex! Gain access to “M&A From A-Z,” your guide to buying or selling a business as shared in a recorded webinar from 2025, featuring Attorney Ken Charette, M&A Advisor Rick Calabrese, and Financial Services Advisor Dave Campbell, when you complete this form:
