Guide to Middle-Market PE Valuations and Deal Terms

The world of middle-market private equity (PE) is a dynamic, data-driven domain where valuations, deal strategies, and effective partnerships shape the future of businesses. In a recent conversation between George Samman, founder and CEO of Growth Drive, and Bob Dunn, managing director of GF Data, they explored a wide array of topics critical to professionals navigating the middle-market private equity space. This discussion delved into valuation benchmarks, emerging trends, challenges in deal-making, and the importance of strategic preparation.

This article distills the key takeaways from their conversation, offering actionable insights for professionals engaged in business acquisitions, from private equity firms and search funds to family offices and independent sponsors. Whether you’re preparing for your next acquisition, optimizing operations, or looking to refine your strategy, this analysis is packed with valuable lessons.

Understanding the Core: GF Data and Its Valuation Methodology

GF Data, as described by Bob Dunn, serves as the gold standard for middle-market private equity-backed valuations and deal benchmarks. Unlike many data providers, GF Data aggregates and anonymizes data from over 330 participating private equity firms, focusing on businesses valued between $10 million and $500 million.

The platform collects more than 30 data points for each transaction, providing a comprehensive breakdown of valuation metrics by industry, transaction size, and other variables. This data is presented in mean, median, top quartile, and bottom quartile slices, offering professionals a robust tool for benchmarking.

Key takeaway: Access to reliable, anonymized, and detailed data is essential for informed decision-making in private equity, particularly in a market where private company information is notoriously opaque.

Trends in the Middle-Market: The Rise of Add-On Investments

One of the most notable trends discussed is the surge in add-on investments. Add-ons - smaller acquisitions made to complement an existing platform investment - have gained traction due to several factors:

• Challenged debt markets in 2023–2024 made financing add-ons easier than larger platform investments.
• Add-ons help bolster valuations, particularly for companies acquired during the high-valuation frenzy of 2021.
• The ability to leverage existing credit facilities from platform investments simplifies financing.

This trend reflects a broader strategic shift: private equity firms aim to build critical mass and enhance portfolio companies’ valuations through targeted acquisitions. Dunn noted that nearly 40% of recent deals involved add-ons, up from 32% in 2022.

Key takeaway: Add-on investments are increasingly vital in creating value, particularly in a volatile market where standalone platform valuations may face downward pressure.

Flight to Quality in Down Markets

In turbulent economic periods, the concept of a "flight to quality" becomes a prevalent theme. Dunn highlighted the hydraulic effect of capital abundance: while overall transaction volumes may decline during downturns, competition for high-quality deals drives valuations for top-performing companies back up.

High-quality targets - defined by predictable cash flow, strong management teams, and scalable operations - remain in demand even during market downturns. These companies often command premium multiples, despite broader market challenges.

Key takeaway: Focus on cultivating a high-quality business with strong fundamentals. Even in down markets, these businesses attract interest and command strong valuations.

The Importance of Sell-Side Preparation

One of the most impactful insights shared was the increasing adoption of sell-side quality of earnings (QoE) reports. Dunn highlighted that businesses conducting sell-side QoE analyses often see up to a half-turn improvement in valuation multiples. The reasons are clear:

• QoE reports identify potential risks and challenges before negotiations, allowing sellers to address them proactively.
• They signal to buyers that the seller is sophisticated, prepared, and serious about the transaction.

Beyond the immediate benefits in a sale process, QoE reports provide valuable operational insights. Even businesses that aren’t planning an imminent sale can leverage QoE findings to streamline operations, reduce risks, and position themselves for future success.

Key takeaway: Investing in sell-side due diligence, including QoE reports, is a powerful tool to enhance valuation and demonstrate readiness for a transaction.

Navigating Rollover Equity and Earnouts

The discussion also touched on common deal structures, including rollover equity and earnouts, which are pivotal in aligning long-term interests:

• Rollover equity, where sellers retain a stake in the business post-sale, is included in nearly 65–68% of transactions. This approach aligns incentives, allowing sellers to benefit from the acquirer’s future success.
• Earnouts, though common, can be contentious. They serve as a bridge between the seller’s valuation expectations and the buyer’s willingness to pay but often lead to disputes due to their contingent nature.

Key takeaway: Understanding and negotiating rollover equity and earnouts effectively is critical to maximizing value and fostering long-term alignment with buyers.

The Transition Challenge: Preparing for Leadership and Operational Independence

Another recurring theme was the importance of future-proofing businesses by building strong senior leadership teams. Many middle-market companies remain overly reliant on their founders or owners, a fact that can be a major red flag for potential buyers. Dunn emphasized that private equity buyers often view management continuity as essential, particularly for platform investments, where the seller’s expertise is invaluable during the transition period.

On the other hand, sellers who manage to step back from day-to-day operations and build resilient, self-sufficient businesses are better positioned for successful exits. These businesses not only attract higher valuations but also create opportunities for owners to exit operational roles while retaining ownership.

Key takeaway: To maximize value, focus on building an effective senior leadership team and operational independence well before entering a sales process.

Deal Terms and Risk Mitigation

The adoption of representation and warranty (rep and warranty) insurance has increased significantly in recent years, particularly as deal markets grow more sophisticated. This trend reflects a shared desire by buyers and sellers to mitigate risks and streamline transactions. By covering potential post-sale liabilities, rep and warranty insurance reduces friction in negotiations and ensures smoother closings.

Key takeaway: Leveraging tools like rep and warranty insurance can help mitigate risks, build trust, and accelerate deal timelines.

Expanding Opportunities: Smaller Deals and New Horizons

Interestingly, GF Data is now expanding its coverage to include businesses with enterprise values between $1 million and $10 million. This shift is driven by growing private equity interest in smaller businesses, both as standalone investments and as add-ons. These smaller deals offer compelling opportunities for buyers, particularly when debt markets are tight, and they also represent a significant portion of the market in terms of volume.

Key takeaway: Smaller businesses are increasingly on private equity’s radar. Sellers in this segment should prepare for heightened interest and competition.

Key Takeaways

• Reliable Data is Key: Leveraging data from credible sources like GF Data ensures more informed decision-making in private equity transactions.
• Add-On Investments are Thriving: Add-ons are increasingly popular due to their role in scaling businesses and bolstering valuations.
• Flight to Quality: Quality companies with strong fundamentals attract premium valuations, even during downturns.
• Sell-Side Preparation Pays Off: Conducting sell-side QoE reports can significantly improve a company’s valuation and mitigate negotiation risks.
• Understand Deal Structures: Rollover equity and earnouts are critical tools but require skillful negotiation to maximize benefits.
• Build Leadership Independence: Future-proofing a business with an effective leadership team enhances value and facilitates smoother transitions.
• Risk Mitigation Tools: Adoption of rep and warranty insurance reflects growing sophistication in deal-making.
• Smaller Deals, Big Opportunities: The $1–$10 million enterprise value segment is becoming a key focus for private equity.

Conclusion

The discussion between Samman and Dunn illuminates the evolving dynamics of middle-market private equity. From the rise of add-on investments to the critical role of preparation and operational independence, there are countless opportunities for professionals to enhance their strategies and drive success.

For business owners and investors alike, the key lies in being proactive: leveraging data, preparing meticulously, and focusing on long-term value creation. Whether you’re navigating the complexities of an acquisition or optimizing a business for future growth, these insights provide a clear roadmap for success in the middle market.

Source: "The Growth-Drive Hot Seat: Cracking the Code–Private Equity and the Middle Market with Bob Dunn" - Growth Drive LLC, YouTube, Aug 7, 2025 - https://www.youtube.com/watch?v=LDiLnrvkqs0

Use: Embedded for reference. Brief quotes used for commentary/review.

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