The 2025 Outlook for Middle Market M&A

For more on the topic, read Christopher D. Fagan’s comments in The Business Journals article by Senior Reporter Andy Medici: Middle market M&A was expected to have a big 2025. Then a wild card entered the mix.

The 2025 middle market mergers and acquisitions (M&A) landscape is a dynamic and evolving space, influenced by a range of factors, from interest rates to global tariffs. In the following blog post, we explore the current M&A landscape and provide insight into how businesses are being impacted.

Comparing 2025 to 2024: Interest Rates and Tariffs

When examining the volume of deals, 2025 has shown surprising consistency with 2024. Despite the slower-than-desired deal activity over the past few years, largely due to rising interest rates, the market has remained resilient. Since the COVID-19 pandemic, middle-market businesses have faced significant challenges, including increased labor costs and supply chain disruptions, which have impacted profitability.

In January, the new administration brought a wave of optimism, reminiscent of the robust M&A market during President Donald Trump’s previous term, when low interest rates fueled deal activity. However, the current economic climate suggests that such low rates may never return. The onset of COVID-19 led to a flurry of deals, as business owners, fearing the worst, opted to sell.

The unexpected imposition of global tariffs, initially thought to be confined to China, has created a sense of paralysis in the market. This uncertainty has led to a gap between expected and actual deal volumes. While the overall volume is similar to last year, the nature of the deals has shifted, with fewer high-value transactions exceeding $100 million.

Hot Areas in Middle Market M&A

Despite the challenges, certain sectors within the middle market are thriving. Smaller deals in business-to-business services, home services, electrical infrastructure and data centers are particularly strong right now. These sectors are considered somewhat recession-proof and are attracting significant interest.

Industries such as construction, janitorial and sanitation, cleaning services, and cloud computing are experiencing a surge in activity. On the residential side, roofing companies, landscaping firms, pest control services, HVAC installers and distributors are highly sought after. These businesses tend to be highly profitable due to relatively low labor costs and strong cash flow.

We’re also seeing increased interest in sectors like accounting, collision repair and auto services. These industries are typically fragmented, and investors see an opportunity to bring them together, strengthen leadership, and build more profitable operations through scale and efficiency.

Cold Areas in Middle Market M&A

Conversely, certain sectors are facing significant challenges. The trucking and transportation industries are heavily impacted by reduced port activity due to tariffs, leading to decreased shipping volumes. Manufacturers and distributors of clothing and electronics, particularly those reliant on China, are also seeing diminished interest.

The automotive sector remains cold until there is clarity on tariff policies, especially given the reliance on imports from Mexico and Canada. Agriculture, too, is a concern due to its dependence on international revenues. Competitive pricing from emerging economies is making it difficult for U.S. producers to compete.

Emerging Trends: AI and Electrical Infrastructure

Artificial intelligence (AI) and electrical infrastructure are emerging within the middle market. The demand for data centers to support AI development is driving significant investment in electrical infrastructure. Projections indicate a substantial increase in electricity production over the next decade to meet these demands.

Institutional money is flowing into electrical infrastructure projects, with a focus on building data centers and the HVAC systems necessary to keep them operational. This sector is developing rapidly and is expected to continue growing as the demand for AI capabilities expands.

The Outlook for the Rest of the Year

The future of the middle market M&A landscape is uncertain. The resolution of tariff issues could potentially unlock a wave of deal activity, but until then, the market remains stagnant. Buyers are factoring in this uncertainty into their valuations, which business sellers are reluctant to accept, creating a standoff.

Despite this, there is still a market for high-quality businesses, with valuations holding steady. However, larger deals are unlikely to materialize until the economic outlook becomes clearer. The fluctuating nature of tariffs makes long-term decision-making challenging, leading to a paralysis in the market.

Ultimately, the middle market M&A landscape in 2025 is characterized by both resilience and uncertainty. While certain sectors are thriving, others face significant challenges. The resolution of tariff issues and the continued development of AI and electrical infrastructure will play crucial roles in shaping the future of this dynamic market.

If you are concerned about how the middle market M&A landscape will affect your business, we can help. Contact us today and our Transaction Advisory team can help you navigate the uncertainty, adapt to new challenges and achieve your goals.