As we close 2024, middle market M&A transactions, typically valued between $10 million and $500 million, have begun to show signs of finally rebounding from their peak in 2021.  As deal activity continues to ramp up, here are some recent trends that we are observing going into 2025:

Evolving Deal Structures

Deal structures, especially those in the middle market, are evolving to accommodate the current M&A landscape and the objectives of middle market participants.  Direct equity rollovers, where sellers are permitted to retain a minority stake in a target company post-acquisition are becoming more prevalent, particularly with private equity-backed acquirors.  While there is some added complexity in documenting such arrangements from a legal perspective, this approach can align the interests of the parties and incentivize sellers to remain committed to the continued health and growth of the business they are selling.   Earnouts, whereby a portion of the purchase price is contingent on a target company achieving specified performance milestones, are also being employed in greater frequency by buyers to bridge valuation gaps between themselves and sellers.  While it is important to clearly define the performance metrics and timelines of an earnout, as well as parameters of how the business will be operated during the earnout period, in order to avoid potential disputes, earnouts can be useful to drive desired behavior and incentivize sellers to meet specific financial targets post-acquisition.

Selective Usage of R&W Insurance

While representation and warranty (R&W) insurance remains a popular tool in M&A transactions, we have observed an increased reluctance from buyers to use R&W insurance in lower-middle market transactions, instead choosing more traditional escrow or holdback mechanisms to protect against a seller’s breach of representations or warranties in an acquisition agreement.  This reluctance is driven largely by the additional cost and time that buyers believe it will take to conduct the level of due diligence necessary to obtain a R&W insurance policy with fulsome coverage and limited exclusions, relative to the overall size of the transaction.

Challenges to Enforcing Restrictive Covenants

Given the increased scrutiny of non-competes and other restrictive covenants across the United States, buyers are continuing to consider how to try to ensure that these restrictive covenants are enforceable, in particular in middle-market transactions that are more prone to key-person risk.  This includes revisiting standard forms of agreements to ensure that the restrictive covenants are reasonable in length, scope and geography and narrowly tailored to the business needs of their organization, delaying termination of employment through “garden leave”-like provisions, and strengthening policies relating to the protection of confidential information and trade secrets.

Heightened Regulatory Scrutiny

In October 2024, the US Federal Trade Commission (“FTC”) finalized significant updates to the Hart-Scott-Rodino (“HSR”) Form and Instructions, representing the most sweeping changes to the HSR Form for US premerger notification filings in 48 years. The changes apply to every HSR-reportable transaction and will significantly increase the burden and time to prepare HSR filings. The FTC’s new rules also focused on interlocking directorates. Buyers sometimes appoint directors to multiple boards within the same industry, which can raise concerns about potential anti-competitive behavior. Under the new HSR regulations, buyers will be required to disclose more extensive details regarding such board connections.  Overall, this is just another reflection of the tougher stance that the FTC has been taking on antitrust generally over the past few years, in particular with respect to private equity-backed acquirors.  Buyers will need to be more proactive in scrutinizing deals for potential antitrust red flags, and will need to allot significantly more time and budget for greater expenses for preparing and making any HSR filings.

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It is clear that M&A activity in the middle market is ramping up. However, as described above, certain recent trends are resulting in added complexities or challenges to completing transactions, or at a minimum, transactions taking longer to consummate.  The recent US election results are also certain to impact the M&A market, with early signs indicating an increase in deal flow and a continuation of favorable capital gains tax rates.

For more information regarding these recent trends, please contact your relationship attorney at Seward & Kissel or Nick Katsanos at katsanos@sewkis.com.