Lower Middle Market: Add-ons Still Key, But Valuations in Question?

The lower middle market (LMM) remains a hotbed for M&A, with add-on acquisitions playing a crucial role. A 2022 report by Axial found that most deal professionals anticipate add-on appetites to either grow or remain consistent, acting as a stabilizing force within the LMM. (Axial's Lower Middle Market Add-On Report). Buyers prioritize revenue synergies over cost reductions, seeking geographic expansion or new capabilities. However, that report also noted that 48% of those in the space say the biggest challenge in executing add-on strategies is the availability of attractive targets.

While the Axial data is a bit dated, the Market Pulse Report Q4 2024, suggests that trends and valuations are still important topics, even though a complete report summary isn't available.

Adding another layer to the picture, The Pepperdine Private Capital Markets Report researches the cost of capital for private businesses. The survey provides data on debt and equity cost of capital broken down by revenue size, industry, and more.

While add-ons appear to be driving LMM activity and will likely continue to do so, other factors influence. These reports paint a picture of a dynamic market where strategic add-ons can drive growth and shareholder value.