The Myth of Recession-Proof Businesses in the Lower Middle Market

The belief that lower middle market (LMM) businesses are “recession-proof” has long been a prevailing narrative. However, this misconception can hinder businesses from preparing adequately for economic challenges. While many LMM companies weathered the turbulence of the post-COVID economic environment, the year 2025 demands even sharper strategies, cleaner financial practices, and impeccable timing to maintain and enhance business value.

This article addresses why LMM business owners must rethink their approach to economic downturns and highlights actionable steps to protect and grow the value of their organizations in an uncertain financial climate.

The Recession-Proof Myth: Time to Abandon It

LMM businesses are often considered resilient during economic downturns, especially those operating in essential services, niche manufacturing, or B2B contracting. However, resilience does not equate to immunity. The risks for LMM businesses have grown more pronounced in 2025, and complacency can lead to significant challenges.

Key Risks in 2025 for LMM Businesses:

• Margin Compression: Inflation and rising labor costs are eating into profit margins.

• Revenue Instability: Customer consolidation or shifts in demand can create revenue volatility.

• Cash Flow Challenges: Payment delays and stretched receivables can affect liquidity and lower valuations.

Simply put, if a business isn’t built with predictable operations and stability in mind, it’s unlikely to achieve a premium valuation during an exit.

M&A Activity Holds Steady—but Only for the Prepared

Amidst the economic challenges, there is promising news for LMM business owners considering a sale. Mergers and acquisitions (M&A) activity remains robust within this market segment. However, buyers are becoming increasingly selective, making preparation critical.

What Buyers Are Looking For:

1. Clean Financials: Businesses must align financial records with Generally Accepted Accounting Principles (GAAP).

2. Recurring Revenue: Predictable, stable revenue streams, such as contractual agreements, are highly valued.

3. Justifiable EBITDA Add-Backs: Any adjustments to earnings must be logical, transparent, and defensible.

4. Operational Efficiency: Lean operations and strong cash flow conversion showcase effective management.

Valuation Insight:

LMM businesses with solid fundamentals continue to secure valuations of 5–7x EBITDA. However, businesses lacking these qualities face steep discounts or risk being overlooked entirely.

The Importance of Timing an Exit Strategy

A common sentiment among business owners is, “I’ll wait until the economy stabilizes before selling.” While waiting might seem prudent, it can result in missed opportunities and declining value.

Why Acting Now Matters:

• Buyer Focus on Future Cash Flow: Buyers are primarily interested in the future revenue potential of a business. Even a temporary dip in earnings could significantly impact valuation.

• Rising Interest Rates: Higher borrowing costs are shifting deal structures toward more conservative setups, including earnouts and seller financing.

• Shrinking Exit Windows: If you plan to sell within the next 24–36 months, now is the time to act thoughtfully and decisively.

Procrastinating could mean navigating an even more competitive and challenging market when you’re ready to sell.

Building Recession-Resistant Businesses

Instead of claiming “recession-proof” status, LMM business owners should focus on creating a structurally attractive and resilient business. This requires proactive planning and strategic decisions that make the company appealing to potential buyers, even in a challenging economic environment.

Top Actions for 2025:

1. Revenue Restructuring

Shift your business model to emphasize recurring revenue streams and maintain margin durability.

2. Diversify Dependence

Reduce reliance on a single customer or vendor to limit concentration risks.

3. Strengthen Leadership and SOPs

Build a capable leadership team and document detailed standard operating procedures to ensure operational continuity.

4. Conduct a Professional Valuation

Partner with experts to assess your business’s market value and understand areas needing improvement.

5. Legal and Financial Clean-Up

Address any outstanding legal, tax, or financial complexities to ensure a smooth due diligence process for buyers.

Value Creation Starts Before the Letter of Intent

Many business owners mistakenly believe that their business becomes valuable the moment an eager buyer presents a Letter of Intent (LOI). The truth is that the value of an LMM business is earned well in advance of any buyer interest. Proper planning, preparation, and strategic decision-making over time are the keys to creating and preserving value.

While economic conditions remain unpredictable, what business owners can control is how they position their businesses to face these challenges. Whether the goal is to sell sooner or operate more profitably long-term, making the right investments today will yield dividends tomorrow.

Final Thoughts

Although no business is truly “recession-proof,” LMM businesses have the potential to remain resilient in uncertain times by focusing on strong fundamentals, operational efficiency, and strategic foresight. By shattering the misconception of immunity to downturns, business owners can proactively build systems that not only safeguard but enhance their organization’s value.

Whether you’re contemplating a sale in the near future or simply looking to weather economic uncertainty, remember this truth: premium value is not guaranteed, but it can be earned. Preparing now will ensure your business is ready to attract buyers and thrive, no matter what the market brings.