Headlines about record-breaking megadeals tell only part of the story of mergers and acquisitions. In the lower middle market, closings are taking longer, buyers are digging deeper into due diligence and deal structures are growing more complex.
Paren Knadjian, a partner at Eisner Advisory Group in Los Angeles, has guided more than 300 M&A and capital markets transactions on both the buy side and the sell side. In this Q&A with ABF Journal Editor in Chief Rita Garwood, Knadjian explains why timelines are stretching, how deal structure bridges valuation gaps and what a slower pace means for asset-based lenders. He also discusses bank consolidation, tax changes and the risk he believes lenders are underestimating.
Watch or read the full conversation below or listen on Spotify.
Rita Garwood: Headlines have been dominated recently by record-breaking megadeals, but the lower middle market seems to be telling a different story. What are you seeing on the ground as we head toward the end of 2026?
Paren Knadjian: It’s a question of value versus volume. A few megadeals obviously increase the aggregate value of M&A transactions. But in the middle market, and certainly in the lower middle market where we are, each transaction is smaller in value, so we have to do a lot more of them to get the same aggregate value. In the lower middle market, the pace of closings, rather than the size of deals, is a greater indication of how the market is doing. The answer is that it’s a mixed bag. Certain industries are doing very well and have high volumes. Others are struggling a little. The main thing we’re seeing isn’t necessarily whether deals are being done, but the pace of deals. The time it takes to close deals has increased significantly recently. That’s a phenomenon we’re seeing in the middle market and certainly in the lower middle market.
Garwood: You have guided more than 300 M&A and capital markets transactions on both the buy side and the sell side. How has the lower middle market changed since you started, and what makes today’s moment different?
Knadjian: The main change is the sophistication and complexity of deals, particularly in their structure. We still see a few transactions that are all cash at close, and that’s the end of that. But in reality, most deals now have rollover equity, earnouts, structured equity or seller notes. There’s quite a lot of innovation as well. Unitranche lending, for example, is a great innovation. Instead of having to worry about two different lenders, senior and subordinated, you have one lender with a blended rate, which is much easier to budget and manage. You don’t have to have intercreditor agreements. That has helped with a lot of transactions. But generally, deals have become more complex than they were 10, 20 or 30 years ago.
Garwood: In your opinion, why are deal timelines in the lower middle market stretching? Is that a temporary condition, or do you think it’s the new normal?
Knadjian: I think it’s the medium-term normal. Things have changed a lot over the last year. Deals are taking longer because buyers have become more cautious. Everyone has a boss to some extent, and private equity buyers have to return capital to their investors. They’re judged by the multiple they return it with, and a number of factors have made that more difficult. Higher interest rates are the obvious one. The cost of debt is higher, so equity investors have to either enter the deal at a lower value or exit it at a higher value to get the same multiples. So they’ve become more cautious. They’re spending a lot more time and money on due diligence and hiring a lot more advisers, which also helps them hedge their bets to some extent. That is the main reason deal times and due diligence are taking longer.
Another factor is volatility. Some of it is geopolitical, some of it is tariffs, and oil price movements have played a part as well. If and when volatility dies down, and if we see some downward adjustments to interest rates, we might see timelines shorten. But for the moment, this seems like the normal.
Garwood: What do those longer timelines mean in practical terms for sellers and for buyers?
Knadjian: They have different effects on each group. Let’s start with the seller. There’s fatigue involved in long deal times, and many sellers are doing this for the first time. They’re not serial entrepreneurs who have sold 10 businesses in a row. Perhaps they don’t even fully know what they have to go through to get a deal done. So deal fatigue is definitely a factor, and it can have two effects. The seller can say, “You know what, I just want to close this, and I don’t care what it means for the price or the structure.” Or they can walk away because they’re so frustrated.
The buyer faces complexities, too. Generally, valuations are done as a snapshot in time, typically based on the trailing 12 months of financial performance. If it’s taking multiple months to close, that window moves, and you have to redo the company’s trailing 12 months because there’s a new month in the picture. It also makes it difficult for buyers to pin down the loan they’re going to use to buy the deal and what rates they’ll pay. It doesn’t suit either party for that period to get longer, but it’s the reality we face.
One of the things we’ve found is that committed buyers will move heaven and earth to get a deal done. They will do whatever is necessary, even if it takes longer. So when we advise clients who are sellers, looking for committed buyers is the number one telltale sign we look for in a transaction.
Garwood: You mentioned that due diligence is becoming more rigorous in these deals. How does that change what buyers are willing to pay?
Knadjian: Generally, you go into a due diligence period having agreed on the valuation your deal is based on. The due diligence activity is built around confirming what you thought you were getting in terms of financial performance, legal structure, taxes and so on. The buyer wants to make sure that what they’re buying is what they thought they were buying before the diligence. So the focus is very much on confirming the information they’ve been given up to that point. At that point, generally, the valuations are set.
Now, if you find out during due diligence that the financial performance wasn’t what was suggested, or maybe there were problems with taxes, then valuations may change. There may be a restructuring or a renegotiation of the deal. These things do happen during a due diligence period. It’s just a fact of how deals are getting done these days.
Garwood: Where do you see buyers and sellers having the hardest time finding common ground, and how do you help them bridge that gap?
Knadjian: I think structure helps here, because agreeing on an enterprise value of a certain number is one thing, but how it’s actually paid is a different thing. For example, including rollover equity in a transaction means the seller is participating potentially in the next round of activity and possibly in a future transaction. Getting a seller note also helps. That reduces the risk from the buyer’s point of view and puts some of the onus on the seller.
If the seller really believes in the buyer and in how they’re going to deal with the company once they’ve acquired it — and most acquisitions are majority acquisitions, so the new entity is controlling — then that gives the seller skin in the game and a chance to participate going forward. That reduces the risk to the seller. So one way of bridging valuation gaps is to agree on the headline number but vary the way it’s paid. They can also include an earnout. If the seller says, “I’m going to have a great next three years,” the buyer can say, “OK, let’s pay you partly based on how you perform in the next three years.” Structure is the way we overcome these valuation issues.
Garwood: Is the story of the second half of 2026 about deal quality rather than deal volume? What separates the deals that close from those that stall?
Knadjian: Quality has always been important, and the more difficult the market gets, the more important it is. There are a lot of companies out there for sale that just don’t have the quality. When we talk about quality, we’re talking about quality of management, earnings, systems and processes. All of those things count toward how a business is going to do in the future. As things become tighter and interest rates rise, and therefore it becomes more expensive to buy businesses, the quality of the company becomes more important. When money is aplenty and interest rates are at virtually zero percent, people can buy companies that might not meet all of those criteria.
Even our criteria for representing sellers are based on our understanding of their core quality. And when we’re representing buyers, that’s the number one thing we focus on when we’re running due diligence on the target. So quality always counts, but especially when markets are a little tighter and more difficult.
Garwood: We’ve spent a lot of time talking about buyers and sellers. Our audience includes a lot of lenders, particularly in asset-based finance. How should asset-based lenders and other secured lenders read a stretched M&A timeline? Does it create opportunities or risks for their portfolios and pipelines?
Knadjian: One thing I mentioned is that if the timetable for a close extends, lenders might have to redo the underwriting. When you’re underwriting a loan, whether it’s for a transaction or not, you’re doing it at a particular snapshot in time, and as that time moves, you might have to redo it. In a transaction, there are multiple parties involved. There’s the equity investor providing cash and the lender providing cash. Nowadays there are also insurance companies doing representations and warranties insurance. All of them are doing due diligence, underwriting and modeling. So it’s basically more work for lenders. It’s not necessarily more risk. It might be lower risk if the target’s financial performance improves. But it definitely is more work and more activity, and therefore, to some extent, more cost associated with the transaction.
Garwood: We discussed how buyers are digging deeper into due diligence. How are quality of earnings, working capital and collateral analysis factoring into those conversations?
Knadjian: I’ll answer in reverse. In an asset-based deal, a deal that relies on assets, collateral is obviously the number one thing. It ties into quality of earnings as well, because quality of earnings has historically focused on the income statement and a company’s earnings before interest, taxes, depreciation and amortization, or EBITDA. Most companies are valued as a multiple of EBITDA. But if you’re an asset-based lender, the balance sheet is as important, if not more important. And most companies’ balance sheets are not necessarily an indication of their actual book value. So understanding the balance sheet, and doing as much diligence on that side of the ledger as on the income statement, is a very important part of a lender’s valuation and a lender’s due diligence activities. That’s a big factor in how deals are getting done.
Garwood: You mentioned earlier that the days of 100% cash deals aren’t happening as frequently. What role is financing playing in deal timing right now? Are you seeing buyers lean more on asset-based facilities, private credit or seller financing to get deals done?
Knadjian: I think it’s all of it. There isn’t an obvious trend favoring one or the other. We see deals that have elements of all of the things you mentioned. Seller financing is an interesting one. A lot of sellers don’t necessarily need the cash on day one. In fact, they might prefer to be paid over time. There are tax implications. You don’t necessarily pay less tax, but it defers your tax over a longer period. If the seller can afford not to receive all that cash at close, and gets paid over time with decent interest rates these days, I think that’s a great option for them.
Seller notes are almost always subordinated to the senior lender, because there is typically a commercial lender involved in the transaction. As long as you don’t mind being subordinated, that’s a great way of earning money over time, with some interest. Most deals have a combination of all of these. There’s definitely some cash at close. There can be a seller note, other future payments or simply delayed payments. A relatively high number of sellers actually prefer an installment sale type of structure. I’m using tax language there because it has a tax implication.
Garwood: I want to talk about bank consolidation for a moment. We’ve continued to see a lot of consolidation among banks. What is driving that? Is it liquidity needs or footprint expansion?
Knadjian: In our experience, two things drive bank consolidation. The first is crises. If you have a global crisis like the one in 2008, there were forced mergers that drove a lot of activity. That was a very specific global issue, and thankfully it doesn’t happen very often. Even more recently, Silicon Valley Bank caused a mini crisis among regional banks, and there was consolidation out of that.
The deals we’re seeing this year are driven by what you would call more traditional rationales. Our data shows more than 80 bank deals in the first half of 2026, which is quite a large number. One rationale is taking a competitor out of the market. If you acquire a competitor, there’s one less competitor to compete with. Technology is also a big factor. Each bank is facing big questions about how its technology, particularly with AI but not solely AI, is going to perform for the organization and its customers. If you know of another bank that has potentially better technology than you, that might be a good acquisition. We’re seeing a lot of activity in the regional bank sector, and we expect to see more. But the reasons are the usual ones: saving money, growing customers and taking out competition.
Garwood: What should borrowers and commercial finance professionals expect when their bank is acquired? Does it change credit appetite or relationships?
Knadjian: First of all, as far as the borrower is concerned, the deal is still the deal. Their terms don’t change because of a change of ownership. They don’t suddenly get a bunch of new covenants or anything like that. That typically doesn’t affect borrowers immediately. Of course, if they’re thinking of refinancing or taking out a new loan, the new ownership might have a different set of rules.
We do see customers affected, and by customers I include businesses. We had a lot of customers at Comerica, which is now Fifth Third Bank, and they’ve seen a lot of changes in the way things like ACH payments get done. There’s definitely some pain involved in moving from system A to system B. It can be upsetting to business customers. Generally they get over it, and things move on. But borrowers don’t typically see major changes in the way the bank deals with them. They have the same set of rules. They have to have an audit or a review every year, for example. We haven’t seen many changes for borrowers as a result of consolidation.
Garwood: In the bank deals you’re seeing, are banks getting into them with an eye toward expanding specific lending niches, such as asset-based lending, specialty finance or equipment finance?
Knadjian: Yes. Banks have bought specialty lenders in the past, although perhaps less so this year. There have been very large examples of large national banks buying specialty finance companies, whether it’s equipment financing, accounts receivable financing and so on. I think that’s definitely a reason. There’s competition between the traditional banking community and private credit, and private credit has grown tremendously. Private credit is capable of doing things banks are not. Banks are regulated in a way private credit isn’t, so they have restrictions on what they can do. But they look at the kinds of deals private credit is doing and ask, “Can we get into that space?” Sometimes that does involve buying a smaller specialty finance company. That makes a lot of sense as a way to get into niches they weren’t in before because of those restrictions.
Garwood: I want to talk about tax changes and how they apply to these lower middle market deals. How are recent tax changes, including accelerated R&D and interest expense deductions, influencing deal timing and structure?
Knadjian: Both of the examples you mentioned have had an effect. Bonus depreciation essentially improves cash flow because it reduces the amount of tax you’re paying. The interest deduction has gone up to, I think, 30% of EBITDA now. That also helps. Both essentially save taxes for corporations. The corporate tax rate didn’t change under the One Big Beautiful Bill Act, but many other tax changes affected corporations positively by improving their cash flow. That’s a factor that can help them get into the M&A markets and get transactions done, because cash flow is a factor in how a buyer looks at a target. I wouldn’t say it’s the main driver of M&A deals, but it’s definitely a factor in determining whether deals get done.
Garwood: Are those changes affecting how buyers model leverage and what they can afford to pay?
Knadjian: The modeling of how much you can borrow, or should borrow, is less determined by tax changes. Most loans in a leveraged buyout-type model are predicated on a multiple of EBITDA. The value of the company as a whole is measured by a multiple of EBITDA, and the loan is a subset of that. For example, if a buyer is purchasing a company at 8 times EBITDA, they might be able to borrow 3 times EBITDA. That calculation, and the underwriting of it, hasn’t been tremendously affected by tax changes.
It is affected by interest rates, because the more you borrow, the more expensive it is. And banks have more restrictions on what multiples they can lend at than private credit, which to some extent has fewer restrictions. But tax changes have not been a big factor. The underwriting equation remains more or less the same and is driven much more by interest rates than anything else.
Garwood: We’ve talked a lot about what you’re seeing currently, but I’d like to focus on the future. I know you don’t have a crystal ball, so you might not be able to answer this with complete accuracy, but what is your outlook for M&A activity in the lower middle market through the end of 2026 and into 2027?
Knadjian: It’s always difficult to predict, and it’s become harder. But we do see some headwinds and tailwinds. On the headwinds, we’ve talked about interest rates so many times now, so let’s just put that down. Cost of capital is obviously a factor. Market volatility is definitely a factor, whether it’s tariffs, stock market activity or the bond market, which has had some interesting times recently. That volatility affects lower middle market M&A activity and makes buyers more cautious. All of these things also lead to valuation gaps between buyers and sellers.
On the other hand, there are some tailwinds, so it’s not all bad news. The biggest one is the amount of money private equity still has to deploy — money that’s been raised but not yet invested. People call it dry powder, and it’s still running at about $1 trillion. Private equity managers don’t make the majority of their money until they’ve deployed it and exited, so there’s pressure to deploy this capital. I believe that has kept the M&A markets more buoyant than they would have been otherwise. The other factor, particularly in the lower middle market, is owner demographics. The boomer generation is definitely at retirement age, and some might say past it. That and a lack of succession are leading to more M&A activity. That drives a lot of the deals we’re involved in. Many of our clients are privately owned, sometimes multigenerational businesses.
So there are headwinds and tailwinds. My guess is it’s going to be up and down and very difficult to predict in total volume or value, but I think it will be kind of what it was in 2026. There were quite a few ups and downs and a few road bumps, but the quality deals, as we talked about, always seemed to make it through. I’m old enough to have been doing deals in 2009, which was probably the most challenging M&A environment in my lifetime. But quality deals were still getting done then. The diamond in the rough always appears.
Garwood: When you look at everything going on in the market today, what is one trend or risk you think commercial finance providers are underestimating right now?
Knadjian: I touched on this a little. When you underwrite a loan, you’re looking at a snapshot in time of financial performance. Virtually all loans require the borrower to have audits or reviews done, but those are annual snapshots of the portfolio company’s financial performance, and a lot of things can happen in a year. A lot of the underlying assets, such as inventory and accounts receivable, can change tremendously, up and down, in a 12-month period. So I think the question is whether all lenders fully understand how their portfolio companies are doing on a weekly, monthly or quarterly basis, because they’re generally getting only annual snapshots. There are probably a lot of businesses that are overperforming against expectations, but there are also many that are underperforming, and understanding that in near real time is a risk for lenders. Until we get better tools and somewhat real-time information from borrowers, I think there are risks associated with lenders’ portfolio companies.
Garwood: The last question I have for you: What would you like our listeners to take away from this conversation?
Knadjian: As I said, there are headwinds and tailwinds, and the quality of deals still counts. If you’re a lender and you see a quality deal, I would say go for it. If your listeners include business owners, with the right committed buyer and good advisers, there are still deals to be made. There are challenges. But when credit is difficult and things are tight, that’s when the quality of the company counts, and the quality of advisers counts. There’s still a lot of activity. It’s not a market that’s closing down or going away. If you’re in the business of lending, you’re not going to make your money if you don’t deploy the capital, so finding the right deals matters. The quality of deals is the most important thing to be looking at.
Garwood: Thank you so much for being on the podcast and talking through all this with me. I really appreciate it.
Knadjian: Thank you very much.