How Tariffs Are Shifting the M&A Landscape in the Lower Middle Market

According to a recent analysis by Bain & Company, tariffs are reshaping investment priorities across industries, with executives adjusting capital allocation strategies to de-risk supply chains and insulate margins. 

Key Report Highlights:

Source: Bain Operations Executive Survey 2025 (n=181)

• Increased Costs: Nearly 40% of surveyed firms anticipate double-digit increases in product input costs due to tariffs.​
  
• Revised Financial Forecasts: Approximately 80% are reconsidering their financial projections in light of these tariff concerns.
  
• Shifted Investment Focus: Companies are reallocating capital towards enhancing supply chains and technology while maintaining their commitments to debt repayment and dividends.​
  
• Mitigation Strategies: To offset tariff-related expenses, 67% are implementing cost-cutting measures, 48% are utilizing internal cash reserves, and others are seeking external financing options.​

How do you plan to fund any tariff mitigation initiatives your organization undertakes?

Source: Bain Operations Executive Survey 2025 (n=181)

To better understand how these macro forces trickle down into lower middle market deal activity, we spoke with experienced Axial M&A advisors whose expertise spans multiple sectors with potential exposure to tariffs. Their insights shed light on how tariffs impact valuation expectations, deal structuring, and even the types of businesses coming to market.

M&A Advisor Q&A: Navigating Tariff Risk in the M&A Process

We spoke with Keith Dee and Jim Cohen to explore how M&A advisors are guiding their clients through an increasingly uncertain tariff environment. Their perspectives highlight how sector-specific dynamics, supply chain planning, and diligence strategies are evolving in real time.

Q: How will different verticals within manufacturing be impacted differently?

Keith Dee, Osage Advisors:

Given the far-reaching nature of the tariffs, all industries will likely see an impact. These include the cost of raw materials, supply chain disruptions, and whether businesses can absorb or are able to pass along to customers. As it relates to the Food and Hospitality sectors, they cater to the consumer. Therefore, if consumer confidence continues to fall, there will be a pullback in spending that will impact their business.

Jim Cohen, Madison Street Capital:

Differing verticals will see impacts based on their unique supply chains, cost structures, and market dynamics.

1. Food & Hospitality: This sector often relies on imported ingredients, packaging materials, and equipment. Tariffs on these imports can lead to higher costs, which may be passed on to consumers. For example, food producers might face increased prices for imported raw materials, while hospitality businesses could see higher costs for imported kitchen equipment.
2. Consumer Goods: As many consumer goods are manufactured using globally sourced components, tariffs can disrupt supply chains, increase production costs, and potentially reduce product variety for consumers.
3. Defense: Perhaps less affected than other sectors due to government contracts and national security considerations, the defense industry often relies on imported specialized materials and components. The impact of tariffs in this vertical can result in increased costs and project delays.
4. Industrial Manufacturing: Tariffs on raw materials like steel and aluminum can significantly impact this sector, leading to higher production costs and potential supply chain disruptions.

Each vertical will need to pay careful attention to its own specific factors, such as domestic sourcing capabilities, pricing flexibility, and government policies.

Q: What do businesses need to do to stay on the right side of these changes as opposed to the wrong side?

Keith Dee:

Political shifts in tariffs are causing uncertainty in the manufacturing sector, potentially impacting the supply chain. Businesses should aim to reduce dependency on suppliers from regions with volatile tariff conditions by diversifying their supply chains whenever possible.

Jim Cohen:

1. Diversification: Try not to rely on one country or region for imports. Identifying suppliers in countries with lower or no tariffs can reduce costs from higher tariff regions and minimize risk.
2. Go Local: Obviously, using local suppliers can completely eliminate import tariffs. This can also result in the inherent benefits of reduced shipping costs and lead times. 
3. Consider Product Design: Reevaluating product design to incorporate tariff-free or less expensive materials may reduce costs.
4. Get Ahead of the Curve: Increasing inventory levels ahead of tariff hikes can stave the increased costs for some length of time.
5. Supplier Collaboration: Open discussions with suppliers about cost sharing, price adjustments, terms, and other elements that can spread the cost and reduce risk.

Q: How are you adjusting diligence processes? What are the key questions you’re asking?

Keith Dee:

The impact of Tariffs will be a significant area of focus for buyers during the due diligence process. The questions we ask clients as we prepare to go to market so they are adequately prepared to answer during the due diligence process include: 

1. What strategies are you employing to manage the impact of tariffs on your business operations?
2. Do you have a second/third source within your supply chain to mitigate the effects of tariffs?
3. What is the financial impact, if any, that tariffs have had on your overall profitability?
4. Are you able to absorb or do you plan on passing on the costs to your customers?
5. How do you stand up to the competition by passing these tariff costs along to customers?

Jim Cohen:

Regarding preparing our clients going to market and the due diligence process, the key questions we ask focus on five core areas:

1. Valuation Impact: The direct effect of tariffs on profit margins and overall financial performance needs to be carefully considered. A deeper dive into a company’s tariff-related expenses will be needed.
2. Vendor Review: The due diligence process will likely include a more thorough review of the target’s supply chain. Pending and in-place tariffs may trigger changes in suppliers or sourcing strategies. This can lead to supply chain disruptions and increased costs.
3. Market Volatility: New and pending tariffs can trigger market uncertainty, affecting pricing and demand. This uncertainty may affect the target’s growth projections and market position.
4. Regulatory Risks: Buyers will need to obtain a complete understanding of the legal and regulatory implications of tariffs. Retaliatory measures or changes in tariff policies can pose risks to the target’s operations.
5. Recognize Opportunities: On the other hand, tariffs might create opportunities for domestic manufacturing or partnerships that reduce reliance on imports. This could be a strategic advantage for certain M&A deals.

Two Deal Stories, Two Very Different Tariff Outcomes

One Axial M&A advisor shared two recent transactions that illustrate just how nuanced buyer reactions can be, depending on the industry, supply chain concentration, and investor profile.

Case Study #1: Tariff Risk Derails a Deal (For Now)

In late December 2024, a metal fabrication company went under LOI with a private equity buyer. Roughly 20% of the company’s cost of goods sold came from a China-based factory under their direct control. Despite strong performance and a proven ability to navigate the tariff shifts of the 2016 Trump administration, the buyer—backed by institutional limited partners—was hesitant.

“The buyer told us, ‘We love your business, but our investors can’t take the uncertainty,’” the advisor said. With the possibility of further tariff changes looming under a new presidential administration, the perceived risk outweighed the upside. The deal was officially paused, with all parties agreeing to revisit post-election in the second half of 2025.

This instance underscores how tariff uncertainty can create real friction in LMM deals, especially when investor expectations and fund mandates constrain buyers.

Case Study #2: Tariff Exposure, But No Red Flags

Just two months later, another deal was moving forward—this time for a consumer products business that sources 100% of its goods from Asia. Despite total exposure to potential tariff swings, the private equity buyer, in this case, didn’t blink.

“Everyone in their space sources from Asia,” the advisor explained. “The belief was that any tariff impact would be passed on across the board, so the playing field stays level.”

For this buyer, the risk was seen as industry-wide rather than company-specific, making it far easier to underwrite. The deal is currently on target to close in Q2.

Conclusion: Getting Ahead of Tariff Risk in LMM M&A

Tariff volatility may not dominate every deal, but it’s increasingly part of the conversation. Getting in front of tariff concerns early can help prevent them from becoming deal-stalling issues later on.

For Business Owners:

Consider tightening up your go-to-market prep by:

• Outlining your supplier diversification strategy—even if it’s still in progress.
• Quantifying the impact of tariffs on EBITDA under different scenarios—it can help keep conversations focused on facts, not fears.
• Demonstrating your pricing power and ability to pass on costs—buyers will be looking for signs of resilience.
  

For Buyers:

• Consider favoring targets with diversified supply chains, especially in sectors heavily exposed to international inputs.
• Incorporate tariff risk into your valuation models—it could protect your downside and justify upside potential.
• Think creatively about structure—earnouts tied to tariff impact scenarios might help get deals across the finish line.

For business owners concerned about how tariff changes might impact your company’s valuation or exit timeline, Axial For Owners can connect you with M&A advisors who specialize in navigating these exact scenarios.

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