There’s a number from this year’s middle market data that deserves more attention than it’s gotten. Companies between $500 million and $1 billion in enterprise value traded at a median 13.4x EBITDA in 2025. Companies between $25 million and $100 million traded at 8.8x. That’s not a small gap. It’s the difference between two markets that happen to share a label.
The easy explanation is size. Bigger companies have more buyers competing for them, more institutional capital chasing fewer assets, more leverage available to support the price. All true. But size alone doesn’t explain why that gap is widening rather than holding steady, and it doesn’t explain why leverage tracked the same divide, with larger deals carrying more than twice the debt load of smaller ones. Something else is going on underneath the multiple.
What’s actually happening is a sorting mechanism. At the upper end of the middle market, scale itself has become a credential. A $750 million company has, almost by definition, survived enough growth, enough turnover, and enough scrutiny to prove out its systems and its management bench. Buyers can underwrite that with more confidence because the business has already been tested by its own size. At the lower end, none of that proof exists yet. A $40 million company hasn’t been forced to build the same infrastructure, which means a buyer has to do the underwriting work the company’s own growth hasn’t done for them.
That’s the real story behind the multiple gap. It’s not that lower middle market companies are worth less. It’s that sponsors can’t coast on scale as a substitute for diligence, and the ones still getting paid well in this segment are the ones who never tried to.
This matters right now because the broader market has spent the last two years rewarding exactly the opposite instinct. Add-on acquisitions have made up close to 70 percent of deal activity, and buy-and-build has been the default playbook precisely because multiple arbitrage used to work without much else. Buy something small, fold it into a platform, sell the platform at a bigger multiple than the sum of its parts. That math is getting harder. Sponsors and advisors covering this space have started saying the quiet part out loud: stacking acquisitions with a few synergies on top no longer commands the valuations it once did.
Which brings the conversation back to the lower middle market, and to a question worth asking plainly. If multiple arbitrage is losing its edge, and if buyers are scrutinizing earnings quality, customer concentration, and management depth more than they were two years ago, then the sponsors who win in this segment going forward are the ones who were already doing that work. Not the ones who are about to start.
This is, frankly, where Argonaut has always tried to sit. We don’t have a sector mandate, and we don’t run a sourcing process designed to surface the maximum number of deals. We evaluate the people running a business as closely as the business itself, because in the lower middle market, the people are usually the entire reason a company either scales cleanly or doesn’t. The multiple gap isn’t a market quirk. It’s the market quietly pricing in how much real underwriting actually happened.
