The Canadian lower middle market is entering 2026 with steady buyer demand, disciplined valuations, and real opportunity for owners who prepare early. While deal activity has moderated from pandemic-era highs, qualified buyers, particularly private equity groups, family offices, and well-capitalized individuals—remain active.
For clarity, when we refer to the lower middle market, we mean businesses with $5 million to $50 million in enterprise value, the true segment where Portage operates and where most owner-operated companies transact.
In this range, valuations remain stable, typically in the 4x–6x EBITDA range for well-run companies, with premium valuations achievable for those with strong fundamentals.
Here’s what business owners should expect in 2026.
- The Big Picture: A Disciplined but Attractive Market for Strong Companies
Buyers are more selective today than they were in 2021–2022, but they are still writing cheques for companies that demonstrate:
- reliable financial performance
- low customer concentration
- strong teams and systems
- clear transition planning
- repeatable or recurring revenue
Many paused processes are reactivating, and buyers with capital to deploy continue to focus on opportunities in the $5M–$50M EV range.
Bottom line:
It’s a strong market for sellers who prepare well and present a clean, stable, and transition-ready business.
- Buyer Activity: Private Equity, Family Offices & Individuals Driving the Lower Middle Market
Private Equity & Family Offices
These groups remain the most active buyers in the lower middle market. They have the experience, capital, and internal resources to evaluate, acquire, and integrate owner-operated businesses. PE demand remains steady across industrials, business services, specialty trades, distribution, and recurring-revenue models.
Strategic Buyers
Strategics are active, but not at the same level as financial buyers, and not with the sophistication seen in the U.S. Many Canadian strategics lack internal M&A teams or dedicated integration capabilities. As a result:
- They are selective
- They typically pursue small tuck-ins or competitor acquisitions
- They move more slowly
- They depend heavily on external advisors
Yes, consolidation is happening, and certain strategics are acquiring competitors to defend market share, expand geography, or secure labour and equipment—but they are not the primary volume driver of deals in this size range.
Bottom line:
Strategics are present, but not dominant. Private equity, family offices, and entrepreneurial buyers remain the real engine of lower middle market M&A.
- Sector Trends in the Lower Middle Market
Deal activity remains strongest in sectors where buyers see predictable cash flow, fragmentation, and opportunities for scale:
Industrial & Manufacturing
High interest continues in:
- niche manufacturers
- engineered products
- companies with technical capability or IP
- value-added industrial services
Business & Professional Services
Especially those with contracts, repeat customers, or recurring revenue streams.
Specialized Trades & Construction
Businesses with commercial, infrastructure, environmental, or regulated specialties (e.g., wastewater, HVAC, fire protection, utilities, maintenance services).
Distribution
Particularly distributors with exclusive relationships, strong service components, or inventory management expertise.
- Cross-Border Buyers: A Meaningful Opportunity for Sellers
U.S. buyers remain active in Canada because:
- the Canadian dollar provides an inherent pricing advantage
- Canadian companies often operate in fragmented markets
- many U.S. platforms are looking for Canadian footholds
Cross-border buyers can bring:
- deeper capital pools
- more aggressive growth strategies
- slightly higher valuations in certain situations
But premium pricing is typically modest—not transformational—and still grounded in cash flow and risk.
- Succession, Retirements & Transition Planning
A large wave of retiring owners continues to drive activity. Buyers value businesses that demonstrate:
- stability
- experienced teams
- long-standing customer relationships
- documented processes
- a clear plan for the owner’s transition
A strong second-in-command remains one of the biggest valuation boosts in the private market.
- Deal Structures in 2026: What Sellers Should Expect
Deal structures are being used more frequently and more thoughtfully than in previous years. Here’s what’s typical in the lower middle market:
Vendor Take-Backs (VTBs)
VTBs remain standard, typically in the 10%–20% range. In some deals, especially where risk is higher or financing is tight, VTBs can reach 25%–30%, but that is less common.
VTBs:
- help buyers secure financing
- reduce risk premiums
- show alignment in the transition
Earnouts
Earnouts are being used more selectively:
- When financial performance is stable: earnouts are less common because buyers feel confident in the forward trajectory.
- When financial performance is spotty, volatile, or coming off a spike: earnouts become a common tool to bridge valuation gaps and align expectations.
Earnouts typically cover 12–36 months and focus on achievable, measurable metrics: EBITDA, revenue, gross profit, retention, or specific milestones.
Equity Rollovers
Still widely used in PE-backed deals, with sellers retaining 10%–30% to participate in future upside.
Diligence Timelines
Diligence has become more thorough. Typical timelines:
- 90–120 days from LOI to closing
- driven by:
- lender diligence
- quality of earnings reviews
- legal, HR, environmental, and commercial diligence
- increased documentation requirements
Gone are the days of 45–60 day closings except for very small or exceptionally clean businesses.
- What This Means If You’re Considering Selling in 2026
To maximize valuation and ensure a smooth process, owners should focus on:
Cleaning up financials: Normalized, verifiable EBITDA is the backbone of valuation.
Reducing owner dependency: Businesses that rely heavily on the owner will always trade at a discount.
Strengthening the management team: A capable #2 can meaningfully increase the multiple buyers are willing to pay.
Building recurring or repeatable revenue: Even incremental improvements raise valuations.
Documenting processes and building operational maturity: Buyers pay for businesses that transition well.
Preparing early: Early preparation shortens diligence, improves negotiation leverage, and reduces deal fatigue.
Canada’s lower middle market is healthy, active, and full of opportunity, but only for companies that present well. Buyers are more disciplined than they were in the peak cycle, but they continue to pursue profitable, well-run businesses with strong fundamentals and predictable cash flow.
With thoughtful preparation and the right advisory support, 2026 can be an excellent year to transition your business on your terms.
Jim Friesen, MBA, CPA, CM&AA
Founder
