Q4 2024 Lower Middle Market Deal Activity
Aggregating market data for private business acquisitions is notoriously difficult, especially at the lower end of the market. Transactions below $100 million are not widely covered by analysts and media, nor do private companies have a reporting obligation similar to SEC regulated public companies. Although small business acquisitions rarely make headlines, they represent nearly three-fourths of merger and acquisition activity (Pitchbook) and can offer important insights into trends relevant for business owners and investors alike.
Given the lack of reporting and data for small business transactions, we find surveys of intermediaries, business owners and investors can offer a glimpse into deal activity. The IBBA Market Pulse, a survey of brokers and mergers and acquisition advisors, is one of our preferred sources for small business transaction sentiment.
About the Q4 2024 Survey
Completed between January 1 and January 15, 2025
Responses gathered from 368 business brokers and merger & acquisition advisors
Covers 330 transactions that were completed in the fourth quarter of 2024
Transactions split into two segments:
Main Street: Less than $2M purchase price
Lower Middle Market: $2M to $50M purchase price
Environment for Small Business Transactions
Heading into 2025, topics that were front of mind for sellers and deal intermediaries were interest rates, election results, and potential tariff impacts. Among survey respondents, 58% signaled that a reduction in interest rates remains the most positive force on the market. Election results were referenced by 42% of respondents as having the most positive impact on the market. Interest rate sentiment in 2025 is a continuation of the sentiment heading into 2024, when high interest rates were cited as the number one headwind to closing deals.
Although tariffs have recently been the source of public market volatility, 49% of survey respondents indicated that tariffs would have no impact on clients, 17% stated that tariffs would have a positive impact, and 33% responded that tariffs would have a negative impact.
Valuation Multiples: Year-over-Year Increase in Multiples for Deals >$5M, but Flat to Down Among Deals Below $5M
For deals in the $5M to $50M range, multiples during the fourth quarter of 2024 ticked up year-over-year to 6.0x from 5.3x in the fourth quarter of 2023. Among transactions below $2M, multiples were flat year-over-year. In the $2M to $5M range, multiples declined to 3.6x in Q4 ‘24 versus the Q4 ‘23 level of 4.0x.
For more information on valuation, the drivers of multiples, and factors that lead to deviations from averages, sellers can refer to this post.
Buyer Interest: Increased Levels of NDAs and LOIs in 2024 vs 2023
Prospective buyer engagement increased at the non-disclosure agreement (NDA) stage and the letter of intent (LOI) stage in 2024. Among respondents, 59% reported a greater level of signed NDAs in 2024 versus 2023. For LOI activity, 48% of advisors indicated that the number of LOIs submitted was greater in 2024 than 2023. To the interest rate reference in the market conditions response above, tight financing can reduce deal activity. Conversely, as interest rates stabilize or decline, buyer activity may continue to increase in parallel with loosening of debt markets.
Structure: Earnouts Reflect a More Balanced Market
Earnouts are often used to bridge valuation gaps by tying some portion of the purchase price to business performance post-close. Earnouts can also be effective for bridging financing gaps should a buyer find it difficult to line up debt or equity to close a transaction. As a testament to the financing use case, during 2023’s elevated interest rate environment, during which financing was challenging to obtain, sale structures with earnouts grew to 10% among deals in the $5M to $50M range. In 2024, the percentage of deals using earnouts showed a steep decline, reverting to the pre-2023 level of about 3%.
Time to Close: Process Timeline Compressed in Q4 2024
For deals in the $5M to $50M range, the typical sale process has historically averaged 10 months from start to close, four months of which were spent post-LOI. In Q4 2024, the process timeline declined to eight months from start to close, with three months of the sale process taking place post-LOI. Pent up buyer demand after a slow period for M&A coupled with declining rates and election clarity may have contributed to this trend.
Exit Planning: Retirement is the Top Catalyst for Sellers
For businesses in the $5M to $50M range, 56% of sellers brought a business to market in the fourth quarter of 2024 due to plans to retire. This level is up from 48% in Q4 2023. Retirement is consistently the number one reason that business owners decide to sell.
Retirement is a milestone for which sellers have visibility, yet a large percentage of sellers have no exit planning process leading to retirement. This is especially notable for companies under $2M in deal size. Preparing for a sale can have a material impact on the odds that a sale is completed.
Signs of Small Business M&A Life in 2025
As of February 2025, the Federal Reserve has lowered rates a full percentage from 2024’s peak, signaling that rate increases are complete for the current cycle. With a lot of capital and demand pent up from a slow couple of years for deal making, and barring any sudden negative macroeconomic shifts, the environment for continued M&A activity could be favorable in 2025.
Preparation for a sale process remains an important step for business owners, and as the IBBA survey shows, a large percentage of owners are not completing advance preparation for a sale. In the interest of increasing the odds of a successful deal outcome, it’s advisable for sellers to begin thinking about a sale process. And based on trends in the IBBA survey, 2025 may be a good year to bring a business to market.
