Every business owner I meet has a value number in their head. Usually, it is a multiplier they heard at a conference that they applied to last year’s EBITDA and rounded up. It is the number they will expect when the letter of intent to purchase their business arrives. It is almost never the number they keep.
SRS Acquiom’s 2026 special report on lower middle-market M&A, drawn from a proprietary database of more than 4,400 transactions, with the newest data from deals that closed in 2025, makes the case in cold numbers. Lower middle-market M&A deals, defined as those with closing payments of $50 million or less, account for more than 40% of total deal volume. They are not simplified versions of big transactions, and in terms of what a seller receives, they are frequently harder to digest.
Lower Middle-Market M&A Puts More Value at Risk, Not Less
Let’s start with escrow, the money held back at closing to cover post-closing claims. In 2025, deals of $25 million or less escrowed an average of 14.6% of transaction value, with a median of 11%. Deals between $25 million and $50 million escrowed an average of 12.8%. Both figures rose year over year.
Now let’s look at the other end of the market. Deals above $750 million escrowed an average of 2.7% of transaction value, with a median of 1.2%.
A business owner selling for $30 million routinely leaves roughly ten times more of the purchase price on the table as a percentage than a company selling for a billion. Usually, it isn’t just a single account. The SRS Acquiom report found that 43% of lower middle-market M&A deals carried multiple escrows, 61% included a general indemnification escrow (up from 57% the prior year), and 22% carried a special escrow on top of that.
The money also sits longer in escrow. The median survival period, the window during which a buyer can assert claims against the seller, ran 15 months in lower middle-market deals, against a 12-month median across all deal sizes. Deals with an unusually long 24-month survival period have tripled in a few years, reaching 9% of lower middle-market transactions.
Then let’s look at the earnout, where the gap becomes something closer to a chasm. Setting aside life sciences, where earnouts have always been standard, SRS Acquiom put the median earnout potential in lower middle-market deals at roughly 57% of the closing payment. Across all deal sizes, that figure was 34%.
Now let’s put those pieces together for a hypothetical $30 million sale. About $3 million goes into escrow for over a year. A meaningful earnout, potentially worth more than half again what was paid at close, must be earned, on someone else’s balance sheet, under someone else’s operating decisions.
The handshake number and the wire transfer are two different conversations.
The Structure Discount Is Real, and the Buyers Named It
The most useful information in the entire report isn’t a statistic, it’s the explanation. Lower middle-market M&A targets, SRS Acquiom notes, may lack the controls and sophistication of larger sellers, which creates more diligence challenges. Buyers respond to that uncertainty exactly as one would expect, with longer survival periods, larger escrows, and more contingent consideration.
This is the structure discount, described by the people who administer it.
It is worth examining what’s happening, because owners tend to misdiagnose it. The discount usually does not show up as a lower headline multiple, it shows up as terms. The buyer will often meet your number and then convert every unanswered question about your customer concentration, your revenue recognition, your undocumented processes, and your key-person dependency into a clause.
Uncertainty doesn’t reduce the price. It reduces the portion of the price you collect.
Owners are also not ready for the fight that follows. Expense funds, the pool sellers set aside at closing to cover post-closing costs, typically run $250,000 to $350,000 in private-target transactions. In deals of $25 million or less, the median was $75,000. In deals above $750 million, the median was $500,000. Yet SRS Acquiom is explicit that lower middle-market claims can be every bit as complicated and lengthy as jumbo-deal claims. It is the same fight, but with only a fraction of the ammunition.
Only 28% of lower middle-market deals with a working capital purchase price adjustment used the “worksheet approach,” a specific agreed calculation methodology, compared to nearly 40% of all deals with an adjustment. That’s a documentation gap that becomes a dispute the moment the numbers get close.
Private Equity Is Coming Downmarket — With Private Equity Paperwork
The competitive picture is genuinely better than it was, as private equity buyers were directly involved in 11% of lower middle-market M&A deals in 2025. On the smallest transactions of $25 million or less, PE accounted for about 10%, up from 4% to 5% in recent years. Private equity portfolio companies bought another 21% of those smallest deals. Strategic buyers held their ground, and non-U.S. buyers grew their share.
More bidders is good news for anyone thinking about an exit in the next three to five years, but it comes with a condition attached. Private equity brings institutional deal mechanics into rooms that previously ran on handshakes. Virtually every deal with a PE buyer includes a working capital adjustment. Management rollovers stayed steady in the lower middle market, appearing in about 10% of transactions on top of the 63% that were all cash.
A more competitive market for your company is simultaneously a more demanding market for your documentation.
Insurability Is a Value-Creation Project
Representation and warranty insurance is a policy that covers breaches of the seller’s representations, shifting risk off the seller’s shoulders and onto an underwriter. It has long been standard upmarket and rare below $50 million, but that’s changing fast. In deals of $25 million or less, RWI appeared in 21% of 2025 transactions, double the 10% seen in each of the two prior years. In the $25 million to $50 million band, it reached 40%. This is significant.
Here’s why this matters: lower middle-market M&A deals with RWI escrowed an average of 5.1% of transaction value. Lower middle-market deals without it escrowed an average of 14.7%.
That’s roughly ten points of transaction value in your account instead of someone else’s, determined largely by whether an underwriter is willing to write your deal. And underwriters will not write a deal they can’t diligence. Clean books, documented controls, real contracts, an organized data room, and a defensible quality-of-earnings position are the price of admission.
Exit readiness has stopped being a nice-to-have and has become a line item with a calculable value. You are not tidying up for the buyer’s comfort; you are qualifying for a financial instrument that keeps a double-digit percentage of your purchase price out of escrow.
What to Build Before You Are in the Room
None of this is fixable during diligence. By the time the LOI is signed, the structure discount is already being priced. The work happens two to three years earlier:
- Financial hygiene that survives scrutiny. Accrual accounting, clean cutoffs, a defensible revenue recognition policy, and a quality-of-earnings study you commissioned yourself rather than one the buyer commissioned about you.
- Documented, transferable operations. Processes that live in systems rather than in the founder’s head. Key-person dependency is a discount you pay at closing.
- Customer and supplier concentration addressed early. Concentration you can explain is survivable. Concentration you discover during diligence becomes an earnout.
- Contracts that actually assign. Change-of-control provisions, unsigned agreements, and handshake arrangements with major customers all convert into holdbacks. Sellers in lower middle-market deals agreed to a holdback 31% of the time, against 21% across all 2025 deals.
- An earnout you could actually hit. If contingent consideration is coming (and in this market it likely is), the metric needs to be one you can still influence after you no longer control the budget. Negotiate the measurement, not just the number.
- Insurability as an explicit goal. Ask what an RWI underwriter would need, then go build it.
Value Creation Is Not a Valuation Exercise
One version of the exit conversation treats value as something you discover. You hire a banker, they run a process, the market tells you what you’re worth.
The SRS Acquiom data argues for a different reading. In lower middle-market M&A, an enormous share of the outcome is determined by structure, and structure is determined by how much uncertainty the buyer has to absorb. That’s not something the market tells you; it’s something you build over years, before anyone starts talking.
That’s why I keep coming back to the same idea in my work: capital is an enabler, not an answer. The discipline underneath it is what turns a good business into a transferable one. It is also, not coincidentally, what makes the business better to own in the meantime. Nobody has ever regretted having clean books and documented processes while they were still running the company.
I’ll be at the Small Business Expo in San Diego on September 18, running a workshop on exactly this: building enterprise value in the years before it gets tested. Over half the room is expected to be mid-market, which means over half the room is sitting on a number in their head that the terms are going to renegotiate.
Better to renegotiate it now, while you still hold the pen.
Shout out to Kip Wallen and his team at SRS Acquiom for the great report. Data in this article is drawn from the 2026 SRS Acquiom M&A Deal Terms Study special report on lower middle-market deals, an analysis of the firm’s proprietary database of more than 4,400 transactions.
