Mid-market deals pick up steam - is the worst over?
So what happened in Q2?
After an exceptionally slow start to the year, small and mid-sized merger activity in the UK showed a clear rebound in the second quarter of 2025. January saw only a handful of UK deals – the lowest monthly figure since 2017 – reflecting a cautious mood as high inflation and interest rates initially dampened activity.
Overall, mid-market M&A gained pace through Q2, with dealmakers reporting improved confidence compared to Q1’s lull. This confidence was echoed by investors, too - investors were increasingly eyeing the UK as macro conditions stabilised, with appetite for well-positioned mid-sized firms rising steadily.
Valuation multiples are holding selectively
Valuations in Q2 were a mixed bag - strong performers still commanded premium prices, while others struggled. Buyers are showing they’re willing to pay premiums for businesses with strong cash flow, clear growth stories, or sector resilience.
Industry data suggest that average deal sizes have skewed smaller this year – for example, nearly 70% of UK insurance-related deals in early 2025 involved targets under £5 million, up from about 59% historically. This indicates some caution, as buyers focus on bolt-on acquisitions and smaller targets, potentially due to a limited supply of larger mid-cap sellers and a still-wide gap in price expectations.
Advisors report that the average EBITDA multiple in the UK mid-market edged up in late 2024 from ~5.2× to 5.35 and has remained relatively stable, suggesting that sellers have adjusted expectations and buyers are willing to pay a bit more for quality assets. But this is no rising tide - multiples are holding firm only in cases where business fundamentals justify it. Buyers remain highly discerning, and average valuations reflect that selectivity.
Overall confidence levels were improving: strategic acquirers and private equity bidders alike were more comfortable deploying capital than they were a year ago, thanks to a slightly more predictable economic backdrop. International buyers hadn’t lost interest in the UK, especially in sectors like infrastructure, energy, and consulting.
What does Labour’s Budget mean for your next deal and what should you do about it?
Chancellor Rachel Reeves’ June spending review has continued the notable shift in fiscal policy under a Labour government – prioritising public investment and growth initiatives after years of austerity measures. The review outlined real-term annual increases of ~2.3% in departmental spending and an extra £113 billion in infrastructure and capital projects, funded by loosening fiscal rules to allow short-term borrowing to rise.
Importantly for dealmakers, markets reacted calmly to this pro-investment stance: Sterling hit a three-year high against the euro and bond yields saw only minor moves, indicating investor reassurance with the government’s emphasis on long-term productivity. These signals of economic stability have helped fuel a broader rebound in investor sentiment, with many buyers returning to the UK market with renewed enthusiasm.
Slight uncertainty led to a slowed market for M&A in the immediate aftermath, but a large capital investment was enough to reassure investors and parties.
Whilst many feared a decreased investment through the expected departure of many wealthy internationals who had held “Non-Dom” tax benefits under the Conservative government, engagement from private equity firms still exists. This, alongside the £113 billion investment, for now seems sufficient. For the long-term impact, however, we can only wait and see. Rachel Reeves is understood to be considering watering down some of her proposed Inheritance Tax changes for non-doms and that should be gratefully received if forthcoming.
From a regulatory perspective, the new government’s influence is also being felt. Labour has signalled a more activist stance on competition and strategic industries, yet it also wants to project the UK as “open for business” to global investors.
Notably, advisors are also reporting an uptick in exit planning discussions. With policy clarity improving and unallocated capital still abundant, many owners are reassessing timelines - hoping to ride the current wave of optimism while fundamentals still support attractive valuations.
Outlook for Q3 2025: Deal Flow and Key Factors
Q3 looks promising - here’s why dealmakers are feeling better about the months ahead:
First, the large volume of available capital is set to drive deals: private equity firms are under pressure to deploy record levels of idle capital and deliver returns to investors after two slower years, and many corporate buyers have built up cash reserves and are re-focusing on strategic acquisitions. This pent-up demand from both financial sponsors and strategic acquirers is expected to translate into greater deal flow, as evidenced by a growing pipeline of auctions and sale processes kicking off over the summer.
Second, financing conditions are likely to turn more favourable. With UK inflation on a downward trend and the Bank of England’s rate hikes largely seen as peaking, the market is anticipating that interest rates could start to decline by late 2025. Such a scenario would lower the cost of debt and improve access to credit, which historically correlates with increased M&A activity.
By Q3, if clearer signals of rate relief emerge, buyers may feel emboldened to leverage up for acquisitions, which in turn could push valuations higher and help bridge the valuation gap between buyers and sellers.
However, it is not all positive, the recent U-turns on cutting welfare payments (estimated to cost £3bn) and the U-turn on winter fuel payments (estimated to cost £1.25bn) leads to an unsure buyers’ market. An estimated £4.25bn shortfall in the budget is unable to be held up by further spending cuts. Instead, this must be funded by government borrowing - leading to a hike in interest rates, or an increase in taxation – which has unknown impacts on the profitability of different firms. For now, markets remain at their multi-year high, but buyers may be increasingly wary, and sellers may want to leave the uncertainty of the current market.
Overall, the outlook for the coming quarter is one of guarded optimism. Buyers remain actively on the hunt, encouraged by improving conditions and clearer policy signals. Sellers are increasingly coming to market, driven often by fiscal uncertainty ahead of budget reforms. We’re also seeing a rise in proactive exit planning, particularly among founders and private equity funds looking to capitalise on the improving backdrop.
How can this affect you?
Thinking about selling or buying this autumn? Reach out - let’s explore how Q2’s momentum could play in your favour. The third quarter will be an important indicator of whether that optimism is truly translating into action on the ground. If current trends hold, dealmakers can expect a steadily busy summer, marked by thoughtful but increasingly confident mid-market acquisitions – and all eyes will remain on economic indicators and policy updates that could either reinforce or temper this emerging revival.
Author, Justin Moore - Partner
