Why 2026 could be a breakout year for middle market M&A

Listen to this article

As financing conditions stabilize and valuation gaps narrow, M&A activity in the middle market is showing signs of acceleration in 2026. Recent industry surveys and direct touch points with potential transaction participants indicate that private equity, independent sponsors and strategic buyers all anticipate increased deal flow in the coming year, setting the stage for a broad-based rebound. Deal activity stalled in early 2025 amid tariff uncertainty, valuation gaps, and cautious lenders, before positive momentum began to emerge toward the end of the year. Now, as capital markets adapt, dealmakers are increasingly optimistic that 2026 may show meaningful increases in middle market M&A activity.

A market poised for acceleration

The middle market experienced volatility from 2023 through 2025 as rising borrowing costs, inflation and geopolitical uncertainty caused many buyers and sellers to delay transactions. Deals that did move forward often required longer timelines and more creative financing structures.

Despite the slowdown, the core drivers of M&A remain intact. Private equity firms continue to hold a significant amount of dry powder ready to be deployed. As markets gradually recover, higher-quality opportunities emerge and valuation gaps between buyers and sellers are narrowing.

Together, these factors suggest the middle market is entering a new phase of activity, with both private equity and strategic buyers poised to put capital to work following a multi-year slowdown.

Creative deal structures remain prevalent

Earnouts, seller notes, and rollover equity have become common tools to bridge valuation gaps between buyers and sellers. These structures are expected to remain common in 2026, but it’s important to approach them with care. The number of deals containing earnouts have increased, likely in response to valuation gaps, but only a portion of potential earnouts are actually realized, which can lead to disputes if terms are not clearly defined.

Sectors commanding premium valuations

Although deal activity is broadening across industries, several sectors continue to attract premium valuations and intense buyer interest. Technology remains a centerpiece of M&A activity, particularly in areas such as software, cybersecurity and AI. Companies across industries are pursuing acquisitions to accelerate digital transformation, strengthen data capabilities and remain competitive in increasingly tech-driven markets.

Health care services is another industry generating strong deal activity. Demographic trends, cost pressures and the shift toward integrated care models are driving consolidation among providers, specialty practices and health care technology platforms.

B2B services also continue to draw attention from both strategic buyers and private equity firms. Many of these companies offer recurring revenue models, scalable platforms and opportunities for “buy-and-build” growth strategies, a characteristic that tends to command strong valuations in the middle market.

Preparation is the new competitive advantage

In today’s deal environment, preparation can make the difference between a smooth transaction and a stalled process.

For sellers, that preparation increasingly begins well before a company formally enters the market. Advisors often recommend assembling at least 36 months of normalized financial statements to help buyers understand underlying performance trends and remove anomalies from recent economic disruptions.

Operational readiness also plays a key role. Companies that can clearly articulate growth drivers, address customer concentration risks and demonstrate operational efficiency often generate stronger buyer interest and more competitive bidding processes.

Cybersecurity has also become an important element for due diligence. Buyers are increasingly evaluating data protection practices, system vulnerabilities and regulatory compliance earlier in the deal cycle. Conducting cybersecurity assessments in advance can help avoid surprises and protect valuation during negotiations.

Navigating a new M&A landscape

While optimism for 2026 is building, the M&A landscape remains complex. Interest rates, geopolitical developments and regulatory scrutiny may still affect deal timing and structure.

Even so, the outlook is improving. Private equity firms continue to hold significant capital, and financing options have evolved to support transactions despite economic uncertainty.

For middle market companies considering a transaction, preparation and strategic clarity are critical. Those that invest in readiness now will be best positioned to take advantage of what could become a more active deal environment in the years ahead.

Jeff Lewis is the team leader of The Bonadio Grouup’s Corporate Finance team, which includes Investment Banking and Transaction Advisory. With almost 30 years of experience, he assists business owners in exiting their businesses and advises clients on all aspects of buy-side and sell-side M&A transactions. Jeff enjoys helping clients meet their goals and firmly believes that simply being helpful to clients and prospects produces the best long-term returns.

John Rogers is a Consulting Manager on The Bonadio Group’s Corporate Finance team, which includes Investment Banking and Transaction Advisory. With over 8 years of experience, he assists clients in various aspects of M&A transactions including sell-side investment banking projects, buy and sell-side quality of earnings analysis, deal structuring and negotiation, and other ancillary transaction support. John values the long-term relationships built with clients and takes pride in guiding sellers and buyers through complex middle market M&A transactions.