THE EFFECT OF TARIFF POLICIES ON GLOBAL LOWER-MIDDLE MARKET M&A

The ongoing tariff implementations under President Donald Trump’s administration have introduced significant uncertainty into global lower-middle market mergers and acquisitions (M&A). With tariffs targeting key trade partners such as Canada, Mexico, and China, both buyers and sellers are adjusting their strategies to navigate the evolving trade landscape.

How Tariffs Are Reshaping M&A Activity
1. Valuation Challenges
• Rising tariffs increase operational costs for businesses reliant on imports, complicating valuation models.
• Buyers are approaching deals with caution, leading to conservative valuations and, in some cases, delayed or canceled transactions.
• Example: A manufacturer importing raw materials from China may see a reduced valuation due to increased production costs and supply chain volatility.

2. Shift in Buyer Priorities
• Buyers are prioritizing companies with strong domestic supply chains to mitigate tariff risks.
• Industries heavily reliant on international trade are seeing heightened scrutiny, with buyers focusing on profitability over aggressive expansion.
• Example: A U.S.-based eCommerce brand with local suppliers may attract more interest than one dependent on overseas manufacturing.

3. Supply Chain Reassessment
• Companies are increasingly looking to near-shoring and alternative supply sources to reduce reliance on tariff-heavy imports.
 Acquirers are targeting firms with established domestic manufacturing or diversified sourcing strategies.
• Example: Businesses investing in North American production facilities are seeing stronger M&A interest as buyers seek tariff-proof investments.

4. Heightened Due Diligence
• Buyers are conducting more thorough assessments of target companies’ exposure to trade risks.
• Areas such as cost structures, sourcing agreements, and operational flexibility are under increased scrutiny.
• Example: A distributor with long-term supplier contracts at pre-tariff pricing may be more attractive than one subject to fluctuating import costs.

Why Sellers Should Still Consider an Exit
Despite these challenges, there are still compelling reasons for sellers to proceed with M&A transactions in the current climate:

1. Strategic Acquisition Opportunities
• Some buyers are actively seeking acquisitions that strengthen their ability to adapt to new trade policies.
• Companies with efficient domestic supply chains or specialized expertise can command strong valuations.

2. Industry Consolidation Trends
• Tariff pressures are driving consolidation, as companies look to scale operations and improve cost efficiency.
• Sellers positioned as valuable strategic assets may find motivated buyers looking to enhance competitiveness.

3. Availability of Capital
• Despite macroeconomic uncertainties, private equity firms and strategic acquirers remain well capitalized and eager to deploy funds.
• Businesses with solid financials can still secure favorable deal terms.

4. Risk Mitigation Through Diversification
​​​​​​​• Sellers exposed to tariff-sensitive industries may benefit from joining larger, more diversified organizations. • Acquisition by a well-resourced buyer can provide financial stability and long-term growth potential