What’s the word of 2025, or at least the first half of the year? Tariff or DOGE? While DOGE is no longer commanding front-page headlines, tariffs have introduced significant complexities and uncertainty into the lower middle market valuation and M&A landscape, impacting both transaction volume and pricing.
Businesses operating in this smaller segment, which I will define as having revenues between $10 and $500 million, can be particularly vulnerable if they have a reliance on global supply chains for raw materials and components. Increased import costs directly compress profit margins, subsequently reducing EBITDA and potentially leading to lower valuation multiples due to the increased risk in the business. The unpredictable nature of trade policies also fosters a "wait-and-see" approach among buyers and sellers, resulting in delayed deals and, in some cases, outright terminations as parties struggle to agree on valuation terms amidst fluctuating market conditions.
This heightened uncertainty has led to a general slowdown in M&A activity, with deal volumes declining in the near term. Buyers are exercising increased caution and conducting more thorough due diligence to assess a target company's exposure to tariffs, its ability to pass on higher costs to customers, and its compliance with customs regulations. To bridge valuation gaps caused by tariff uncertainty, deal structures are increasingly incorporating features like earn-outs, contingent consideration, and higher levels of equity rollovers or seller notes. These mechanisms transfer some of the future profitability and valuation risk to sellers, making transactions more complex but also providing pathways for deals to close.
Despite these challenges, tariffs are also creating strategic opportunities. Companies with predominantly domestic operations and minimal international supply chain exposure are becoming more attractive to buyers, often commanding stronger multiples. Furthermore, service-based businesses, with less reliance on physical goods and global supply chains, may find themselves in a more favorable position in the current environment, drawing increased buyer interest due to their reduced tariff exposure.
How have tariffs impacted your business? Drop me a line and let me know. Write me at lbell@meadenmoore.com or try the old fashioned way by calling 216-928-5360.
