M&A Deal Slowdown in 2025 Is Setting Stage for Open Floodgates

Heading into 2025, merger-and-acquisition dealcreaters hoped that a more favorable economic environment and reduced regulatory headwinds would generate renewed activity.

Their initial enthusiasm has given way to a more measured approach, as persistent uncertainty continues to slow down decision-creating and suppress deal volume. We have noticed a few things.

Uncertainty is delaying deals. While the top conclude of the market remains active, the broader transactional landscape appears hesitant. Strategic purchaseers often are better equipped to price in emerging risks (such as tariffs) becautilize they are already managing those exposures in their own businesses.

By contrast, private equity purchaseers evaluating new platforms may face a steeper learning curve as they test to price in these unknowns.

Nevertheless, market participants remain cautiously optimistic, anticipating a resurgence in deal volume as new challenges become more familiar and macroeconomic signals stabilize.

Valuation gaps are reshaping the deal process. Less willing to accept seller-provided numbers at face value, purchaseers are scrutinizing quality of earnings and adjusting earnings before interest, taxes, depreciation, and amortization, or EBITDA, calculations, creating longer diligence cycles.

In response, sellers—particularly founder-owned businesses—are seeking to frontload key economic and legal terms earlier in the process to avoid surprises that could derail the deal later. Letters of intent, which once contained few transactional particulars beyond the headline price, have become much more detailed as a result.

Parties increasingly are applying the letter of intent itself to memorialize valuation drivers such as EBITDA and working capital assumptions, debt-like items, employment and retention terms, non-compete language, and earnout metrics.

Matters that were once “to be mutually agreed” are giving way to definitive, upfront commitments. The growing risk of letters-of-intent breakage, which is reported to have increased since April, should accelerate this trconclude toward ironing out major deal points before exclusivity is granted.

Deal structures are evolving to mitigate uncertainty. Earnouts and deferred payments—already a mainstay of the M&A market in deals involving emerging technologies—are becoming even more prevalent across all industries and transaction sizes.

Buyers are modeling downside scenarios, including supply chain disruptions—which have been a major concern since the pandemic—and businesses are implementing near-shoring and other mitigation strategies.

Private equity is adapting with creative structures. PE sponsors are employing continuation vehicles and similar transactions to hold onto strong, undervalued assets. In some cases, preferred equity structures are being utilized mid-life cycle to inject fresh capital and manage downside risk.

These structured capital solutions, such as convertible instruments and complex preferred waterfalls, have become more common as firms seek creative ways to obtain deals done without compromising long-term viability. But even the most innovative structures must not distract from core business fundamentals.

Deal backlog is building as limited partner pressure mounts. Many PE firms are under pressure from limited partners to generate liquidity before raising new funds. As a result, there is a significant pipeline of companies waiting to be brought to market.

This backlog, combined with historically high levels of dry powder, suggests that conditions are forming for a robust wave of deal activity once the dam breaks.

Artificial ininformigence has an emerging role in deal execution. AI is being incorporated across the M&A process—from deal sourcing to due diligence and data summarization. However, as today’s tools are still prone to errors and omissions, human oversight remains critical.

Looking forward, AI’s most promising applications involve collecting diverse, unstructured data from reliable sources and synthesizing these data to support objective and predictive analyses.

Representations and warranties insurance claims are growing. Brokers and underwriters report that the severity of R&W claims, which are created in approximately one in every five insurance policies, has been increasing.

As purchaseers weigh their carrier options before obtaining a policy, historical claims handling should be an important consideration. We have found that some purchaseers are willing to pay higher premiums for a smooth underwriting process and a carrier that is known to pay out claims.

Notably, R&W insurance is also gaining traction in take-private transactions, reflecting purchaseers’ committed efforts to protect their financial models in an uncertain environment—even when the transactions involve public, audited companies.

Looking Ahead

While uncertainty continues to weigh on the pace of M&A activity, the underlying ingredients for a strong market are taking shape. A growing backlog of high-quality assets, ample dry powder, and evolving deal structures that balance risk and reward all point toward renewed momentum.

The timing is unclear, but when macroeconomic clarity emerges, dealcreaters may find themselves in a highly competitive and active environment once again.

This article does not necessarily reflect the opinion of Bloomberg Industest Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.