The M&A market continues to be strong in the industrial supply sector on both the manufacturer and distributor fronts. And while at times you may not experience it, there seemingly are always conversations.

While on the distributor side the decision drivers relate to generational change (and lack of succession) and need to invest on the part of sellers, for buyers it is pursuit of scale either for regionals, national distributors, or PE-backed firms. They may seek to add geography, fill in geographic holes, or seek diversification opportunities.

For manufacturers it is inevitably broadening their product offering and scale. At times, with smaller companies, it is generational issues. PE can be involved throughout.

Recently I ran across a report from Capstone Partners that succinctly captured some of the trends in the M&A landscape. Below is an overview. You can access the full report via the link.

Why Industrial Distributors and Manufacturers Should Pay Attention to Capstone Partners’ 2026 M&A Outlook

The latest Industrials Industry Annual Report and M&A Outlook points to a market that is still selective, but increasingly constructive for 2026. After a difficult 2025 marked by lower deal volume and valuation pressure, the outlook now centers on stronger financing conditions, active private equity interest, and durable demand tied to data centers, automation, reshoring, and aftermarket services.

Industrial distribution and manufacturing are entering a phase where buyers are rewarding resilience over size alone. Companies with technical depth, recurring service revenue, and exposure to mission-critical end markets are the ones most likely to attract capital and strategic interest.

M&A Is Moving from Caution to Selectivity

The report highlights that industrials deal volume fell 24.6% year over year in 2025, reflecting a cautious market shaped by inflation, tariff volatility, and valuation gaps. At the same time, private equity participation reached 47.6% of transactions, the highest level Capstone has tracked, which shows that capital is still available for the right assets.

Average EV/EBITDA purchase multiples slipped to 8.9x in 2025 from 9.3x in 2024, while public market valuations held up more strongly. That spread suggests buyers remain disciplined, but it also creates opportunity for companies that can prove consistent earnings quality, differentiated positioning, and operational resilience. As a note, in the electrical industry we’ve seen manufacturer acquisition multiples in the 12-16x range with one utility-oriented manufacturer going for 24x! Electrical distributor deals, for larger companies, are 90-100+% of sales. Smaller companies appear to go for 3-5x EBITDA according to Channel Marketing Group sources.

Why Industrial Distributors Matter More Than Ever

For distributors, the report reinforces a simple reality: product breadth alone is no longer enough. Capstone highlights the growing importance of aftermarket services, technical support, and recurring customer relationships as major value drivers across industrial sectors.

That is especially relevant for distributors that serve customers in HVAC, flow control, environmental services, and precision manufacturing. Businesses that combine inventory availability with application expertise, field service, kitting, repair, or lifecycle support are better positioned to defend margins and command buyer interest.

Manufacturers Face a New Set of Growth Drivers

The report’s outlook is equally clear for manufacturers. Demand is being shaped by reshoring, modular manufacturing, automation, and the rapid buildout of data centers and power generation.

The report suggests that buyers are especially interested in businesses that can scale with long-term infrastructure spending rather than those dependent on purely cyclical demand.

Data Centers Are a Structural Tailwind

One of the most important themes in the report is the rise of data centers as a lasting industrial growth engine. Capstone says U.S. data centers consumed about 4.4% of electricity in 2023 and could reach 12% by 2028, underscoring the scale of the opportunity for suppliers and manufacturers tied to power, cooling, and water systems.

That growth supports demand across several industrial categories, including HVAC, flow control, liquid cooling, electrical infrastructure, and precision manufacturing. It also favors companies that can help customers move faster, handle higher thermal loads, and operate with greater reliability.

Services and Recurring Revenue Still Win

A consistent message throughout the report is that service-heavy models are becoming more valuable. Capstone says OEMs and distributors are expanding service portfolios to create recurring revenue streams and strengthen customer retention.

For industrial businesses, this is one of the clearest paths to stronger valuation. Companies that can sell parts, maintenance, monitoring, repair, and long-term support are less exposed to commodity pricing swings and more likely to generate stable cash flow.

Automation Is Redefining the Floor

The report also points to physical AI, agentic AI, robotics, and collaborative automation as major forces reshaping operations. Capstone expects these technologies to improve productivity, address labor shortages, and change how factories, warehouses, and supply chains are managed.

For manufacturers and distributors alike, that means automation is no longer just a cost-saving initiative. It is increasingly a competitive necessity, especially for companies trying to improve throughput, reliability, and service levels in a tighter labor market.

This is another reason why companies are looking at AI for business process optimization. Distributors who are starting or in the early stages of this journey may be interested in Channel Marketing Group’s The AI-Enabled Distributor eBook, which is written from a practitioner viewpoint by individuals who’ve been in the in distribution space.

Financing Conditions Are Improving

Another important signal in the report is the improving capital environment. Capstone says rate cuts, tighter spreads, and stronger credit availability helped improve confidence late in 2025 (although rates have recently risen), while private equity maintained significant dry powder for new investments. It is also interesting to note that, frequently, large distributors finance deals through cash flow (and earn incremental rebate income from the acquisition) and have the ability to seek bank financing and/or float bonds.

Growth equity activity also rebounded sharply, with capital invested in industrials rising 80.9% year over year to $48.3 billion. That indicates investors are still willing to back businesses tied to this sector.

What 2026 Could Mean for Owners

Capstone expected gradual rebound in industrials M&A as financing conditions stabilize, pent-up demand returns, and succession-driven transactions increase. The report also notes that many industrial business owners expect revenue growth in 2026 (which the Pulse of Industrial Supply highlights), which supports a healthier environment for both organic expansion and strategic transactions.

For owners of industrial distributors and manufacturers, the implication is clear: the market is favoring preparedness. Businesses with clean financials, customer diversification, strong service offerings, and exposure to high-priority end markets well positioned if they choose to buy, sell, or raise capital in 2026.

The Bottom Line

Capstone Partners’ outlook shows an industrial market that is not returning to the old playbook. Instead, buyers are focusing on durable platforms, technical capability, and businesses that can benefit from structural themes such as data center growth, automation, and reshoring.

For industrial distributors and manufacturers, which means the next wave of value creation will come from specialization, service, and operational flexibility. In a selective market, those are the attributes that matter most.

Take Aways

• The industrial supply channel continues to consolidate.
• Now, you’d expect an investment banking firm to paint a rosy picture (after all, they need to generate deals!) but we’ve seen the market continue to consolidate. Publicly held companies need to report growth to Wall Street and the easiest way is via acquisition. Distributors without a succession plan, and who haven’t explored an ESOP (which is a viable solution), are also prime for a transaction as they need an exit plan to monetize the business.
• The market goes through continuous change. These deals rarely occur quickly. They take a degree of planning, of outreach (or, in other words “marketing and selling”) and much introspection if you are the seller as you need to ask, “what do I want?”

Channel Marketing Group has been involved with some distributors and manufacturers in thinking through the process from a strategy and opportunity viewpoint. If you’d like a third party perspective, give us a call.