The pace of dealmaking is picking up, says Robert Brown, president of DataStrike, and the debt markets are starting to accept the higher interest rates.
“PE firms are adjusting to the new norm of higher rates,” Brown says. “They seem to be underwriting deals that make more sense and are more flexible.”
The signs, according to James Myers Jr., vice president, business development at BEAM Collaborative, suggest a 2025 M&A environment that is dynamic and full of opportunities.
“Economic stability, rising valuations and strong buyer demand are driving activity,” Myers says. “Private equity firms are aggressively pursuing deals and the generational shift of retiring business owners is creating a steady stream of businesses entering the market.
Though there is continued M&A activity despite macroeconomic challenges, it’s more selective, says George R. Thomas Member Metz Lewis Brodman Must O’Keefe.
“Strategic buyers and private equity firms are focused on high-value, transformative deals rather than broad-based acquisitions,” Thomas says. “Rising interest rates have increased the cost of leverage, making financing more expensive and impacting deal structures. This environment favors cash-rich strategic buyers or PE firms with strong dry powder.”
While Kristine Carpenter, vice president legal and assistant corporate secretary at Constellium, says the general outlook for 2025 is cautious optimism, the fourth quarter of 2024 was a busy time, which indicates that the appetite for M&A is increasing and bodes well for a busy 2025.
“From all facets, there are upsides in 2025 — buyers need to continue deploying capital effectively in an environment where shareholders and stakeholders continue to push for growth,” Carpenter says. “Sellers are always looking to make a meaningful exit or need to optimize their portfolio.”
Dealmakers we spoke with seem generally bullish on the coming year in M&A, though conditions in some areas affecting dealmaking are less than ideal and a cause for a measured approach. They offer their perspective on the M&A environment and how they see the deal year wrapping up.
Watching the market
Among the macroeconomic factors the dealmakers we spoke with have their eye on are the geopolitical landscape in the backdrop of a new administration taking over in the Oval Office; the tariff environment and its impact on trade imbalances and earnings at multinational businesses; the budget deficits and tax policy, and their impact on capital formation and CAPEX; and progression of inflation and its impact on interest rates and labor economics, says Rama Subba Rao Mithipati, CFO of Aquatech International,
Thomas says he, also, continues to pay attention to interest rates and inflation.
“Higher interest rates have made debt financing more expensive, reducing leverage-based dealmaking, especially for private equity,” Thomas says. “Increased borrowing costs and uncertain inflation projections could temper valuations, causing longer negotiations or a shift in deal structures, such as earnouts or equity rollovers.”
Further, Thomas says concerns about a potential global economic slowdown or mild recession persist.
“Uncertain economic conditions may cause acquirers to delay or scale back on large transactions,” Thomas says. “On the other hand, distressed assets and underperforming companies may present acquisition opportunities for cash-rich buyers.”
Nick Conti, vice president at 3 Rivers Capital, says now that the interest rate regime has changed, the incoming administration’s impact on the markets will be the closest thing to watch in 2025.
“Some of the policies proposed by the incoming administration could have a significant impact on the supply and demand of middle-market companies,” Conti says.
Carpenter agrees that the ushering in of a new administration in the U.S. will have impacts on the M&A market.
“Advisers are watching for changes in government regulations, tax law, interest rates and competition law among myriad other policy positions,” Carpenter says. “Even without proposed changes, the rhetoric after 2024 is one of being pro-business and pro-growth, which can impact business sentiment.”
However, economic and policy uncertainty seems to be making everyone a bit more cautious, says Toby Kreidler, Director, Stellex Capital Management.
“Beyond interest rates and inflation, we’re seeing more focus on supply chain resilience with potential tariffs under the new administration,” Kreidler says. “Labor shortages and an aging workforce are some other additional topics of focus.”
Still, stable GDP growth of 1.9 percent, consistent interest rates and favorable credit markets are significant in the shaping of the M&A landscape, Myers says.
“These factors foster confidence among buyers and sellers,” Myers says. “Additionally, potential deregulation and tax incentives could further boost dealmaking, making this a strong year for M&A activity across various sectors.”
Strength gets numbers
Because strategic buyers are seeking acquisitions to drive growth, expand capabilities or enter new markets, sellers with strong financials, proven growth potential, or niche expertise can command premium valuations.
“Quality still wins,” Kreidler says. “If you’ve got a strong business with good fundamentals, there are still buyers out there, especially strategics. Companies that have adapted to the current environment are also in demand — for example, domestic manufacturers that have invested heavily in robotics, automation and technology to improve labor productivity.”
Sellers have a multitude of exit options today, perhaps more than they ever have, Conti says. Those include selling to a strategic, a private equity group, an individual, an ESOP, or a management buyout. But too many options can create challenges.
“The capital markets are increasingly liquid and accessible, which can cause sellers confusion during exit planning,” Conti says. “With exit options increasing, I think buyers must find more ways to add value to sellers pre- and post-close.”
Subba Rao says working in sellers’ favor is that there’s lots of cash on the sidelines chasing deals in a moderating interest rate environment.
While sellers can anticipate a market in which strategic buyers need continued growth and are searching for inorganic ways to continue achieving their economic targets, the headwinds of the past few years continue, Carpenter says. Still, there is pressure on strategic buyers to both minimize risk and deliver shareholder value.
Thomas says economic conditions have caused buyers to adopt more conservative valuation approaches, often resulting in lower offers compared to previous years.
“Buyers are scrutinizing revenue growth, profit margins and forecasts more rigorously, leading to tougher negotiations and reduced willingness to pay premiums,” Thomas says. “Further, higher interest rates and tighter lending standards have constrained leveraged buyers, such as private equity firms, reducing the pool of potential acquirers or deal sizes.”
Also, the valuation gap is real, Kreidler says, adding, “sellers need to be realistic about what the market will bear.”
Myers says valuation gaps between sellers and buyers can pose challenges, particularly in competitive industries.
“Regulatory scrutiny in sectors like health care and technology may also complicate deals,” Myers says. “To overcome these hurdles, sellers must present clean financials, articulate growth potential and engage experienced advisers to navigate the process.”
Year of prudence
Buyers are taking advantage of a generational shift, acquiring established businesses as retiring owners look to sell, Myers says. Improved credit markets and record levels of dry powder are enabling buyers to pursue strategic acquisitions. And with many businesses SBA-loan prequalified, buyers are well-positioned to act quickly and secure deals.
More realistic valuations, in some cases, are giving buyers a bit of an advantage, Kreidler says. The current environment is also a chance to be selective and focus on strategic fit and operational quality.
“Buyers right now have the ability to grow the pipeline of potential deals because a lot of companies and CEOs have been on the sideline for the last couple of years,” Brown says. “They have been waiting for the market dynamics to change and that is occurring as we speak.”
Thomas says valuations in many sectors have come down from the peaks of recent years due to rising interest rates, economic uncertainty and shifting market conditions. This adjustment creates opportunities for buyers to acquire quality assets at more favorable prices. But higher borrowing costs due to increased interest rates have made leveraged buyouts and debt-financed acquisitions more expensive, reducing purchasing power for buyers reliant on external financing.
“Banks and other lenders are more cautious, limiting access to capital and increasing the scrutiny of deal structures,” Thomas says. “Economic instability and fluctuating financial performance in many sectors make it difficult for buyers to assess fair valuations, increasing the risk of overpaying. And many sellers remain anchored to pre-pandemic or peak-cycle valuation multiples, creating a disconnect between buyer offers and seller expectations.”
For Subba Rao, while sustained strength in GDP growth rate with record back-to-back years in the market are a benefit to buyers, impending changes to tax policy could create headwinds. Navigating economic and policy uncertainty, Kreidler says, makes forecasting just a bit tougher.
Brown says because the M&A market is coming back, multiple bids are being placed with good, if not over-the-top, valuations.
“Buyers are encountering stiff competition for attractive businesses, which can drive up valuations,” Myers says. “Regulatory issues in specific industries also present barriers to closing deals. To succeed, buyers need to conduct thorough due diligence, remain flexible with deal structures, and pursue acquisitions that align with their long-term goals.”
Carpenter says sellers and buyers continue to face economic environments that are unpredictable, largely due to geopolitical and macroeconomic factors.
“As a result, sellers and buyers have a number of competing objectives on any given day,” Carpenter says. “M&A requires significant time, effort, resources and planning, and buyers and sellers need to be able to commit to their M&A objectives while continuing to manage day-to-day operations.”
She says failure to plan and lack of clarity on strategic objectives are large obstacles in getting deals done. Sellers need to be prepared well in advance of a sale process for full fledged financial and legal diligence. Anticipating a buyer’s diligence process and proactively addressing issues or disclosing issues leads to greater deal certainty.
Buyers, for their part, are keen to purchase streams of revenue growth and not liability. The past few years have shown an increase in shareholder and stakeholder engagement, she says, leading management teams and boards to make considered and risk averse decisions. However, both need good advisers and clarity on their objectives in order to be able to absorb large amounts of information and still make decisions.
“Decision fatigue in both the M&A and business environment is real, and being able to deftly navigate complex issues is critical to a successful M&A process,” Carpenter says.
Great expectations
With inflation moderating and interest rates potentially peaking or beginning to decline, Thomas says buyer confidence is likely to improve, leading to a rebound in deal activity in 2025.
“With private equity funds under pressure to deploy capital, the middle market will see increased activity, particularly in sectors offering scalable growth or recurring revenues, while large corporates will continue to spin off non-core assets, creating attractive opportunities for buyers in the middle-market space,” Thomas says. “Companies in industries under financial pressure, particularly as some companies struggle to refinance debt in a high-interest-rate environment, will create opportunities for buyers to acquire assets at lower valuations.”
Kreidler expects an uptick in M&A activity in 2025, fueled by demographic shifts driving family business transitions, public companies unlocking value through carve-outs, and private equity firms pursuing exits of mature portfolio companies.
“While the macro environment appears supportive, forward curves indicate that interest rates will remain elevated, a stark contrast to the easy money policies of years past,” Kreidler says. “Consequently, the days of financial engineering as the primary value driver are over. Going forward, we believe successful deals will result from a relentless focus on operational improvement.”
Myers says M&A activity in 2025 is expected to end on a high note, with increased deal volumes and rising valuations. Strong economic conditions, coupled with eager buyers and motivated sellers, will drive continued momentum. The market is likely to remain favorable for sellers, while buyers will continue to seek scalable businesses with growth potential.
“In the light the anticipated supportive policy environment, it is likely to be a fairly strong deal year,” Subba Rao says.
Brown expects more deals to happen in 2025.
“The excitement in the buyer and seller market is better than it has been the last few years,” Brown says. “Things are settling down. Activity is up. 2025 should be a good year for the investment community.”
View from the early stage
On the early stage side, Ven Raju, president and CEO of Innovation Works, says overall, venture funding and valuations have contracted quite a bit from all-time highs of 2021. And liquidity options for late-stage tech companies remain limited as capital markets have largely been unfavorable for late-stage tech IPOs. This has prompted renewed focus on capital efficiency for investors and companies alike.
Still, it’s easier than ever for entrepreneurs to launch business ideas.
“The democratization of technology along with access to networks and capital help enable entrepreneurs to quickly build and test products and get them into the market faster than ever before,” Raju says. “This has only compounded with the availability of AI tools to help develop and market products and services.”
Meredith Meyer Grelli, Asst Dean of Entrepreneurship Initiatives, School of Computer Science; Director, Project Olympus and Asst Professor of Entrepreneurship, Tepper School of Business, Carnegie Mellon University, says entrepreneurs who are finding success today are those who start small, pick a wedge, nail the wedge, and have an advantage in terms of data sourcing and data accuracy.
“They can then grow from there,” Meyer Grelli says. “Entrepreneurs working to build yet another marketing AI bot will face a tougher road in terms of fundraising.”
Despite these opportunities, Meyer Grelli says entrepreneurs face significant challenges, particularly in scalability and funding.
“Expanding beyond that initial focus without diluting the product’s effectiveness or losing its competitive edge can be difficult as they begin with a specific niche,” she says. “Additionally, the current investment climate is quite challenging, especially for those seeking early stage funding. Seed funds are difficult to secure, as investors are becoming more cautious and selective about where they place their bets.”
Over the course of the past 10 years, Raju says significant global capital inflows into alternative asset classes, including venture, have contributed to increases in deal volumes, deal sizes and valuations.
“While we have come down from the all-time highs of 2021, it isn’t necessarily bad for investors as valuation and valuation expectations are calibrating to more ‘rational’ levels and creating opportunities for investment,” he says. “Further, transformative technologies like AI are providing for investment opportunities that didn’t exist before.” ●
