Capstone Partners Reports: Middle Market M&A Valuations Ease, Market Players Retain Confidence in a Turnaround in 2025

BOSTON, April 3, 2025 /PRNewswire/ -- Capstone Partners, a leading middle market investment banking firm, released its 2024 Middle Market M&A Valuations Index, reporting that middle market M&A activity in 2024 showed signs of stabilization after facing valuation pressure in 2023. While equity markets largely shrugged off the rapid interest rate hikes last year, dealmaking remained constrained by high financing costs, uncertain cash flow projections, and a cautious private equity buyer pool. As a result, average middle market M&A valuations declined to 9.4x EV/EBITDA in 2024, compared to 9.6x in 2023 and 9.9x in 2022. The median EBITDA multiple also dropped for the fifth consecutive year, reflecting a continued narrowing pool of competitive bids. Despite this challenging valuation environment, several industries demonstrated resilience. Agriculture, Business Services, Consumer, Energy, Financial Technology & Services, Healthcare, and Industrial Technology sectors saw year-over-year (YOY) improvements in average EBITDA purchase multiples, suggesting selective strength in certain sectors.

Buyers remained highly selective in 2024, with high-quality assets, particularly in services-focused areas, still drew strong competition. The share of 2024 deals closing at 10.0x EBITDA or higher rebounded, rising 56.3% after a steep decline from 2022 to 2023 (-181.3%). Businesses providing essential or specialized services—ranging from healthcare to financial technology—served as hot-spots, attracting strong buyer interest. This was evident in both specialized technical and professional services. Concurrently, deal sizes trended higher, as the average enterprise value of targets increased from $112.5 million in 2023 to $166.8 million in 2024, with further expansion poised for 2025. Deal size dispersion widened across lower middle market ($10-$100 million), core middle market ($100-$250 million), and upper middle market ($250-$500 million) transactions. Lower middle market deals accounted for 40% of transactions with disclosed enterprise values, while upper middle market deals followed closely at 36%. This was a sharp shift from 2023, when just 6.3% of deals were in the upper middle market and 56.3% were in the lower middle market indicating that buyers, seeing improving economic conditions, have shifted their focus from smaller, easily digestible acquisitions to larger, synergistic ones. Despite this, companies remain under significant cost pressure. Proposed tariffs are beginning to take effect, and with inflation persisting, the Federal Reserve has held interest rates steady, further constraining financing costs.

The U.S. has endured a structurally higher interest rate environment since 2020 to combat elevated inflation, which challenged more than half (59.2%) of middle market business owners surveyed in 2024. While the Federal Reserve's 100 basis point interest rate cuts in the final four months of 2024 will likely provide some relief on borrowing costs, business owners may not see the direct impacts until further cuts are implemented. In 2024, the average gross margin among sold middle market businesses rose to 41.3%, compared to 32.3% in 2023. Heightened interest rates persisted as the cost of servicing debt, or refinancing debt, remained high, with companies demonstrating lower YOY average net debt ratios (0.4x net debt/EBITDA in 2024 versus 1.8x in 2023). The deterioration of operating income to cover interest expense witnessed in 2023 began to rebound in 2024 as middle market targets fortified balance sheets with the interest coverage ratio rising from 3.7x in 2023 to 4.3x EBIT/Interest Expense in 2024 but remained below 2022's median of 5.8x.

We are in the third year of an abnormally long M&A downcycle for private businesses, with market corrections generally lasting 12 to 24 months. This indicates that the market is overdue for a rebound in activity. Capstone has tracked several datasets that indicate the market is turning–including a reentrance of private equity platform acquisitions, which rose 4.7% YOY in 2024 and marked the first uptick since 2021. The M&A market will inevitably bounce back, and the improving macroeconomic environment paired with increasing pressure for private equity to deploy investor capital may be the catalysts needed to drive increased deal flow.

Also included in this report:

• A breakdown of average middle market M&A valuations by industry.
• Discussion of middle market M&A transaction volume on an industry level.
• Commentary on the operating performance of target companies sold in 2024 compared to prior years.

To access to full report, click here.

ABOUT CAPSTONE PARTNERS

For over 20 years, the firm has been a trusted advisor to leading middle market companies, offering a fully integrated range of investment banking and financial advisory services uniquely tailored to help owners, investors, and creditors through each stage of the company's lifecycle.  Capstone's services include M&A advisory, debt and equity placement, corporate restructuring, special situations, valuation and fairness opinions and financial advisory services.  Headquartered in Boston, the firm has 175+ professionals in multiple offices across the U.S. With 12 dedicated industry groups, Capstone delivers sector-specific expertise through large, cross-functional teams.  Capstone is a subsidiary of Huntington Bancshares Incorporated (NASDAQ:HBAN).  For more information, visit www.capstonepartners.com.

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SOURCE Capstone Partners