The U.S. M&A market looks stronger in 2026. Announced deal value reached approximately $1.2 trillion during the first five months of the year, nearly twice the level recorded during the same period in 2025, according to PwC.[1] Strategic buyers remain active. Private capital is available. Financing markets are functioning.
The underlying market is less forgiving. U.S. transaction volume declined modestly even as aggregate deal value surged, with larger transactions accounting for much of the increase.[1] In the lower middle market, buyers continue to pursue attractive companies, but valuation disagreements are becoming a more visible source of friction.
The market is not broadly repricing businesses higher. It is increasingly distinguishing between those buyers are willing to compete for and those they will consider only at a discount.
A Recovery Defined by Selectivity
Describing the current M&A environment as simply strong or weak is unhelpful. PwC counted 4,653 announced U.S. transactions during the first five months of 2026, down approximately 4% from the comparable prior-year period, even as total announced value nearly doubled.[1] BCG has observed a similar pattern globally: deal value rose sharply while transaction activity remained uneven.[2]
The lower middle market reflects the same divide. In a July survey of 79 buyers and M&A advisors, Axial found that 87% expected transaction activity to remain steady or increase during the second half of 2026. Ninety-one percent expected buyer competition to remain steady or increase.[3]
Those findings suggest a market with available capital and continued buyer interest, but not one in which every asset benefits equally. Businesses with durable earnings, defensible margins, diversified customers and credible management teams can still draw substantial interest. Companies with weaker earnings quality, concentrated customers, owner dependence or aggressive forecasts may still transact, but often with greater resistance on price and terms.
The more useful distinction is not between a good market and a bad one. It is between businesses whose risk profiles invite competition and those whose risks must first be discounted, structured around or explained.
Valuation Has Moved to the Center of the Negotiation
The clearest indication comes from transactions that do not close. In Axial's midyear survey, 57% of respondents identified valuation expectations as the leading reason transactions failed during the first half of 2026. That compares with 28% for transactions that failed in 2025. Timing and process fatigue accounted for another 16%. Only 10% cited diligence findings, 9% macroeconomic uncertainty and 8% financing constraints.[3] Valuation appears to be playing a larger role in stalled transactions than it did a year ago.
A buyer can be interested. Debt can be available. A business can generate multiple indications of interest. None of that settles the question of value. Sellers and buyers also approach that question from different directions.
Owners naturally give weight to what has already been built: growth, customer relationships, intellectual property, market position and years of investment. Transaction comparables can reinforce those expectations, especially when the most visible precedents involve exceptional assets.
Buyers underwrite what happens next. They are paying today for cash flows that remain uncertain. Customer retention, margin durability, management depth, capital requirements, financing costs and execution risk all affect what those future earnings are worth.
The seller is often pricing what the company has become. The buyer is pricing both what it could become and what could go wrong. The resulting gap is not always evidence of unreasonable expectations. Instead, it reflects a disagreement over the quality and risk of future earnings.
Earnings Quality Is Widening the Valuation Spread
Market multiples can create a false sense of precision. A company producing $5 million of EBITDA with recurring revenue, diversified customers, stable margins and independent management is not economically equivalent to one producing the same EBITDA while relying on a founder, a small number of customers or unusually favorable recent conditions.
The earnings may be identical. Their durability is not. Buyers are not purchasing EBITDA in isolation. They are underwriting the probability that those earnings survive the change in ownership and continue to grow.
Axial's respondents identified competition for quality assets as the leading source of upward valuation pressure in the second half of 2026. Business performance and financing conditions were among the principal sources of downward pressure.[3] That suggests the spread between stronger and weaker assets may matter more than movements in the average market multiple.
Buyers continue to pay attractive prices where conviction is high. They appear less willing to extend the same treatment to businesses carrying greater execution or earnings risk.
Transaction Structure Is Part of Valuation
Nearly two-thirds of Axial's respondents expect valuation multiples to remain broadly stable during the second half of 2026. At the same time, dealmakers reported greater use of seller financing, earnouts, holdbacks, and other forms of contingent consideration.[3]
SRS Acquiom's 2026 lower-middle-market deal terms analysis found that 35% of transactions with closing payments of $25 million or less included an earnout. Among deals of $50 million or less, the figure was 29%.[4]
Structure can make two nominally identical offers economically very different. A $50 million offer paid entirely in cash at closing is not equivalent to a $50 million headline value that includes an earnout, rollover equity or deferred consideration. Escrows, working-capital adjustments, indemnification obligations and financing conditions can widen the difference further. The highest nominal offer is not necessarily the strongest transaction.
These mechanisms can bridge genuine valuation disagreements. They can also transfer risk. If the buyer believes the seller's forecast, it can pay for it. If the buyer remains uncertain, part of the consideration can be made contingent on the forecast proving correct.
Market Testing Matters More Than Valuation Theory
Valuation models do not determine what a company will sell for. Buyers do. Different acquirers can assign materially different values to the same business because they are underwriting different economics. Strategic synergies, distribution advantages, acquisition platforms, financing flexibility and divergent views of industry growth can produce different prices from the same financial information. A single buyer's offer is therefore only one buyer's view of value.
A valuation range remains theoretical until the market is tested. One buyer's enthusiasm can weaken during diligence. Several credible buyers provide stronger evidence of where demand actually clears.
Competition can also affect more than headline price. It may influence cash paid at closing, earnout terms, rollover requirements, working-capital treatment, indemnification protections and the duration of exclusivity. That leverage often diminishes quickly once a seller commits to one counterparty.
Uncertainty Is Being Priced More Explicitly
The common thread in valuation, diligence and deal structure is uncertainty. Buyers do not ignore what they cannot verify. They discount it, defer payment against it or seek contractual protection from it. Reliable financials, defensible adjustments and credible forecasts make it harder for a buyer to justify a discount.
Weak financial reporting can become a valuation issue. Aggressive EBITDA adjustments can become a credibility issue. Unsupported projections can become an earnout. Customer concentration can become a purchase-price discount. Heavy owner dependence can become a transition obligation.
The timing of disclosure matters as well. A weakness identified before a process begins can often be addressed or incorporated into positioning. The same weakness discovered late in diligence may become leverage for a buyer that already has exclusivity.
That dynamic helps explain why some transactions deteriorate between the letter of intent and closing. Sellers often negotiate the headline valuation before the buyer has completed its most detailed examination of the business. In M&A, uncertainty is priced or allocated.
Company Timing Can Matter More Than Market Timing
Owners considering a sale naturally ask whether the market will be better six months or a year from now.
Perhaps. The more important question is whether the company will be. A business with accelerating earnings, stronger margins and a developing management team may create substantial value by waiting. A business approaching the loss of a major customer, a cyclical slowdown or a difficult owner transition may not have the same luxury.
A modest improvement in financing conditions will not compensate for deteriorating earnings. Conversely, selling into an active market may still be premature if another year of performance would materially improve the company's financial profile.
Axial's survey illustrates the difficulty of waiting for clarity. Roughly two-thirds of respondents expected political and economic uncertainty to have about the same effect on transaction activity during the second half of 2026 as during the first.[3]
Waiting for better conditions can be rational. The best time to sell is never determined by the market alone. It is when the company's performance, competitive position, owner objectives and external environment align favorably enough to outweigh the cost of waiting.
A More Discriminating M&A Market
The 2026 M&A market does not appear short of buyers or capital. It does appear less tolerant of uncertainty. High-quality companies can still command strong competition and attractive valuations.
Selectivity should not be confused with weakness. For well-positioned businesses, continued buyer competition can still support attractive valuations and favorable terms. The difference is that those outcomes are increasingly earned rather than assumed.
Sources
[1] PwC, U.S. Deals 2026 Midyear Outlook. U.S. announced M&A activity and deal-value data through the first five months of 2026.
[2] Boston Consulting Group, Global M&A Outlook, 2026. Analysis of first-half 2026 global transaction activity and the concentration of the recovery.
[3] Axial, Lower Middle Market M&A Outlook: 2H 2026. July 2026 survey of 79 lower-middle-market buyers and M&A advisors regarding deal activity, buyer competition, valuation, failed transactions and market conditions.
[4] SRS Acquiom, 2026 Lower Middle Market Deal Terms Study. Analysis of earnouts and other transaction terms in smaller private-company acquisitions.
Continue Exploring
Middle-Market M&A Insights from Versailles Group
Access additional resources or stay connected with Versailles Group for updates on middle-market M&A, valuation, and transaction strategy.
