Economic snapshot: Amid U.S. uncertainty, optimism in NE Wisconsin
Company relocation to Green Bay is ‘already paying dividends’
January 27, 2025
Following a significant slowdown in M&A activity during 2023 and 2024, the lower-middle market is primed for a resurgence in 2025.
A variety of factors are aligning to create a more favorable environment for deals, potentially unlocking pent-up demand from both buyers and sellers.
More reasonable cost of capital
Interest rates are projected to moderate, with analysts forecasting two to four rate cuts in 2025.
As the cost of capital becomes more manageable, strategic and financial buyers will be able to pursue acquisitions more aggressively.
Lower borrowing costs enable buyers to increase leverage without compromising debt ratios, effectively expanding their buying power.
Private equity firms in particular are positioned to benefit from this shift, as more affordable debt financing allows them to structure deals with optimal leverage.
The improved financing environment is also likely to draw traditional lenders back into the market with greater enthusiasm.
Banks and other financial institutions are expected to offer more flexible financing terms, helping to bridge the gap between buyer and seller expectations that often stalled deals in recent years.
Improved economic sentiment
A more positive economic outlook will drive M&A activity.
According to the Citizens 2025 M&A Outlook, 64% of private equity firms and 62% of mid-size companies expect the economy to improve in 2025.
The improved economic outlook is bolstering confidence among buyers, while the business community expects an easing in the regulatory environment.
These conditions together have left people feeling rather bullish.
Pent-up supply and demand
A significant backlog of deals has accumulated during the past two years of subdued activity.
Many business owners who delayed their exit plans during the higher-interest-rate environment are now reassessing their timing.
The Citizens 2025 M&A Outlook shows seller interest is growing, and we’ve experienced that firsthand here at Cornerstone.
We had more serious seller inquiries come in between the election and 2024 year end than over the six months prior.
Another proof point: In 2022 and 2023, we averaged four to five offers per client.
But in 2024, we averaged 10 per client.
There’s so much money in the marketplace but fewer quality sellers, driving up competition.
Improved valuation environment
The combination of lower interest rates and stronger economic sentiment is expected to support
more favorable valuations in 2025.
As the cost of capital decreases, buyers can justify higher multiples while still achieving their required returns.
Again, according to the Citizens 2025 M&A Outlook, more than half of private equity respondents expect valuations to rise this year.
Looking ahead
Together, these factors suggest 2025 could mark a significant turning point for M&A activity in the lower-middle market.
Though challenges and uncertainties remain (President Donald Trump’s tariffs and deportation strategies remain wild cards), the fundamental drivers of deal activity appear to be aligning in a way that could unlock significant transaction volume.
For business owners considering an exit, this improving climate may be a good time to start preparing for sale.
Similarly, buyers who have stayed on the sidelines may find 2025 an attractive time to enter as financing costs moderate and a broader selection of quality acquisition targets becomes available.
