CMA recently convened a roundtable of its senior M&A experts, Partners Chris Parisi and Warren Feder, and Director Michael Gordon, to reflect on 2025, discuss key trends shaping the middle market, and share perspectives on the forces driving deal activity as we approach the new year.
How would you characterize the dealmaking environment so far in 2025?
Chris Parisi:
Looking back, “Liberation Day” was a major inflection point. Dealmaking effectively ground to a halt for four to six weeks, and we shifted almost exclusively to executing transactions that were already in progress. As clarity slowly emerged around tariffs and other uncertainties, the market experienced a period of whiplash, followed by a cautious and gradual attempt to restart deal activity.
Warren Feder:
I agree. Things slowed dramatically after the initial tariffs were announced. Deals were still getting done, but primarily those already in motion before “Liberation Day” or those involving purely domestic businesses with U.S.-based manufacturing, like our former client, Gulf Coast. At the same time, the bid-ask spread widened considerably, and capital markets remained largely seized up.
Are there signs that the environment might change as we head into 2026?
Michael Gordon:
Recent conversations point to a meaningful post-Labor Day pickup. Several buyers have said the last two months have been busier than the first half of the year combined. Another notable trend is the surge in private equity add-ons. With so much uncertainty in the market, buyers are gravitating toward deals that offer more knowledge and visibility, and add-ons provide exactly that.
Warren Feder:
There is an enormous amount of dry powder right now. Buyers have weathered the uncertainty brought on by tariffs and a challenging labor environment and increasingly feel pressure to deploy capital. As a result, many are moving down-market or loosening their parameters. We expect these dynamics to persist into 2026.
Chris Parisi:
I agree. We are also seeing very aggressive moves from large players in hot sectors like data centers. Big funds are coming down market in a significant way, sometimes $4–$10 billion funds bidding on $10 million EBITDA deals. That makes it tough for middle-market firms to compete, especially when larger funds can offer higher valuations.
Let’s dive deeper into the tariffs. How have they affected dealmaking this year?
Chris Parisi:
After the post-COVID supply chain crisis, smart companies have expanded their vendor bases from single-source to dual-source and increased inventory levels. Many realized that the “just-in-time” inventory model is great, until it’s not.
Warren Feder:
The impact of reshoring and nearshoring is very real. Attorneys moved quickly to renegotiate manufacturing contracts to bring production back across borders, for example, from Ontario to Detroit, immediately following the tariff announcements. Companies were forced to reassess cost structures almost overnight.
How have recent immigration policy shifts affected middle-market businesses?
Michael Gordon:
The due diligence sequence is changing. Immigration audits have moved to the front of the process, ahead of the traditional first step of conducting a quality-of-earnings analysis. This new scrutiny is slowing down the M&A process and has become an additional factor owners must weigh when considering an exit.
Warren Feder:
Unlike quality of earnings findings, immigration issues carry substantial legal risk for owners. If due diligence uncovers a compliance problem and the deal falls through, the owner now has actual knowledge and may be legally required to act. Whether this deters owners from pursuing exits is something we are watching closely. What hasn’t changed is our commitment to preparing owners for the challenges they may encounter during diligence.
AI has been another major disruptor this year. What role has it played in the M&A process?
Chris Parisi:
The investment required for AI is prohibitively expensive for many lower-middle-market businesses. Deciding whether to make those investments can serve as a major inflection point, and often motivates owners, particularly older ones, to sell to a strategic or private equity partner with the capital and expertise to modernize.
Michael Gordon:
Owners are constantly seeking efficiency gains, and AI is a major source of potential improvement. But implementation carries risk. For smaller middle-market companies, rolling out new systems can backfire badly if execution is flawed.
Warren Feder:
Exactly. We advise owners not to introduce new technology during the sale process. Instead, focus on continuing to do what they do best. Building an adaptable, change-embracing culture is more valuable than introducing untested systems mid-sale.
Michael Gordon:
Internally at CMA, AI has helped us streamline analysis and extract insights from large datasets more effectively. Externally, clients are seeing similar benefits. Finance and accounting teams are generating actionable insights more fluidly. Sales teams have more tools. Manufacturing equipment is becoming smarter and more efficient. One family-run manufacturing client invested in a machine that reduced its cost of goods sold by 50%, saving millions.
Are there any other trends you’re watching heading into 2026?
Chris Parisi:
The private credit market is a key area of concern. It has been extremely aggressive. With refinancing at higher rates and ongoing earnings uncertainty, there’s a real risk these lenders may be overextended. Problems in this space could freeze capital markets and impact deal closings. A spike in restructuring activity in Q3 would be an early warning sign.
Warren Feder:
Despite a quiet year, private equity firms are sitting on approximately $3 trillion in undeployed capital heading into 2026, which bodes well for dealmaking next year. And one trend that won’t change: Baby Boomers will continue to seek strategic exits, ensuring a steady flow of potential sellers.
Michael Gordon:
Data center companies will remain red hot. We expect this sector to continue driving meaningful deal activity. AI adoption will also accelerate. Companies of all sizes are investing in tools that make employees more productive, and that trend will only intensify in 2026.
