Software M&A at Mid-Year: A Market Pulling Apart

The dominant story in software this year has been written in the public markets. What began as a handful of cautious analyst notes has hardened into something closer to a repricing, the "SaaS-pocalypse" as it has been only half-jokingly called, in which investors took a hard look at seat-based and workflow software and asked an uncomfortable question: how much of this revenue is actually defensible against AI? The result has been a sustained compression in software multiples, with some of the names that led the 2021 rally now trading at a fraction of the forward revenue figures they once commanded.

That mood does not stay contained to the public side. It reaches private deal-making quickly, and it has. We have spent the first half of the year talking with founders who watched the comps they used to benchmark against fall by half, and who are now unsure whether this is the moment to run a process. Some buyers have shared the hesitation. A number of strategics and sponsors pulled back to reassess where AI leaves their own portfolios before underwriting anything new. Uncertainty, for once, is being felt on both sides of the table.

And yet deals are getting done. That is the part of the story the headlines tend to miss. Quality software is still changing hands, and it is still clearing at strong valuations, in some cases at multiples that would not have looked out of place two or three years ago. What has changed is not whether the market is open, but who it is open to.

This is the defining feature of the current environment: bifurcation, and to a degree we have not seen in recent memory. The top of the market and the bottom of the market are no longer on the same curve. Premium assets — durable growth, genuine retention, a defensible position in a vertical that AI augments rather than erodes, are commanding the kind of pricing that makes founders glad they waited. But the drop-off below that tier is steep, and it is unforgiving. For lower-quality assets, the ones carrying soft net retention, undifferentiated products, or a value proposition that a capable model now threatens to replicate, the bottom has effectively fallen out. The middle, where a lot of companies quietly assumed they lived, is thinner than it used to be.

It would be a mistake to read this as buyers retreating. Software investors remain very much risk-on. Dry powder has not gone anywhere, and the strategic logic for consolidation has only strengthened in a market where scale and proprietary data increasingly decide who wins. What has moved is the barrier to entry. The bar to simply submit a bid is meaningfully higher than it was even eighteen months ago. Buyers are more selective about which processes they will engage in at all, more disciplined about the quality threshold an asset has to clear before they commit real resources to it, and far quicker to pass on anything that does not fit cleanly.

Diligence has followed the same path. Technical and product diligence in particular has intensified in a way that anyone running a process this year has felt. Buyers are no longer content to take a product roadmap at face value. They want to understand a company's actual AI posture, not the slide, but the substance. How exposed is the core workflow to automation? Is the company building with AI or bracing against it? How much of the moat is real, and how much is switching cost that a better tool could erode? Questions that were once a single workstream now sit at the center of the investment thesis, and sellers who cannot answer them convincingly are finding that valuation conversations stall before they start.

For Canadian companies in the lower middle market, all of this sharpens the case for preparation. The firms being rewarded are not necessarily the largest or the fastest-growing. They are the ones that can stand up to scrutiny and tell a credible story about why their business gets stronger, not weaker, as AI proliferates. That story has to be supported by the numbers, the architecture, and the customer behaviour, because buyers are now checking all three.

We move into the second half of 2026 cautiously optimistic. The fundamentals of a healthy M&A market are intact: capital is available, strategic appetite is real, and quality continues to be paid for. A well-run process around a genuinely strong asset can still produce an excellent outcome, and we expect that to hold. But we are equally clear-eyed about the other side of the spread. Companies facing performance challenges, or carrying real exposure to AI disruption without a convincing answer to it, will continue to find the market a difficult place to operate in. The gap between the two is unlikely to narrow any time soon.

For founders weighing a sale, the takeaway is less about timing the market than about being honest with themselves regarding which side of it they sit on, and, where there is time to do so, putting in the work to move closer to the side that gets rewarded.