By Lou Sokolovskiy

How Trump’s tariffs are reshaping America’s lower middle market M&A landscape

Ever since returning to the White House in January, President Donald Trump has been busy introducing new rounds of sweeping tariffs, reigniting trade tensions that had cooled during the intervening years. 

Framed as a patriotic push to revive domestic industry and slash trade deficits, the policy has already carried particular weight for a specific—and often overlooked—corner of American capitalism: the lower middle market.

These are firms too small to dominate headlines, yet too significant to ignore—businesses with annual revenues between $5 million and $100 million. Their footprint spans manufacturing, logistics, and consumer goods, sectors tightly wound into global supply chains. 

As tariffs disrupt trade routes and inflate input costs, these firms now find themselves navigating unfamiliar terrain, with implications for mergers and acquisitions (M&A) activity that are only beginning to unfold, according to media reports. 

Tariffs as Taxation

The 2025 tariff package imposes a minimum 10% levy on all imports, escalating to 50% for select nations—chief among them China, Japan, and EU member states. The administration’s goal is unapologetically domestic: bolster American production and correct trade imbalances. Yet the consequences are far from contained. 

According to J.P. Morgan, tariffs could drive personal consumption expenditure (PCE) prices up by as much as 1.5% this year, reducing GDP growth and cutting household spending by an estimated $1,200 per family annually.

The knock-on effect on dealmaking has been swift. Reuters reports that U.S. M&A activity dropped 13% in Q1 of this year. Global deal volumes have fallen to their lowest point in at least five years. For now, the driver is less the tariff itself than the opacity surrounding its implications. 

“It’s not the tariffs, per se, that are the problem,” Antony Walsh, a corporate M&A partner at Eversheds Sutherland, told Reuters. “It’s the level of uncertainty that’s coming with them that’s having the most impact on C-suite confidence.”

The Middle Market Caught in the Middle

Smaller firms are uniquely ill-positioned to weather trade disruptions. Their margins are thinner, their leverage smaller, and their supply chains more fragile. Tariffs are inflating procurement costs, pinching margins, and forcing firms to either raise prices or suffer profitability hits. Either way, EBITDA multiples—the metric at the core of M&A valuation—take a hit.

David Horwich of GHJ gives a vivid example of a potential seller forecasting “a nearly 1/3 drop in EBITDA profitability” due to tariffs, a blow that has led to a postponed, possibly defunct, transaction. Firms with global exposure are being penalized; conversely, domestic businesses with minimal foreign dependencies are fetching stronger acquisition premiums.

Creative Structuring, Conservative Strategy

In response, the structure of deals is evolving. According to CLA, private equity firms are increasingly relying on earnouts, contingent payments, and adjustments to material adverse effect (MAE) clauses. Horwich echoes this trend, saying increased use of earn-outs, higher equity rollovers, and seller notes “will transfer some of the risk tariffs may have on the target’s future profitability and downside risk in valuation to the sellers.”

In parallel, vertical integration is enjoying a renaissance. Middle-market companies are snapping up suppliers or distributors to reduce exposure to input-cost fluctuations. Some have viewed this trend as a strategic hedge, especially in manufacturing and consumer-facing sectors. Tariffs are also prompting defensive consolidation—acquiring competitors or distressed assets to shore up market position.

Winners, Losers, and Bystanders

Not all sectors are equal in this reshuffled deck. Industrial and consumer goods are heavily exposed to tariff volatility. CLA notes longer timelines and more rigorous diligence processes in these areas. Meanwhile, business services, technology, and healthcare remain relatively resilient, continuing to attract deal activity. Horwich noted that “opportunities” in targets less impacted by tariffs, such as business services and education, are gaining traction. Some foreign buyers, eyeing tariff relief, are acquiring U.S. manufacturers directly.

Distressed assets are also emerging as acquisition targets. Companies that failed to adapt quickly are being repriced—or dismantled. For savvy investors, this is a fire-sale moment in slow motion.

Survival Tactics

To stay ahead of the storm, firms are updating their playbooks. Horwich said that buyers were increasing operational due diligence to assess tariff exposure and supply chain resilience. Buyers now demand stronger representations and warranties to guard against tariff-related risks. Flexible structuring is not just popular—it is essential. Supply chain diversification—through stockpiling, hedging, or rerouting sourcing—is also being deployed to manage risk.

A Sector on the Back Foot—But Not Beaten

Despite the challenges, some observers detect opportunity. In the CLA piece, Craig Arends, managing principal Seamless Growth, Private Equity, writes that while Trump’s tariff proposals present challenges, they also offer a chance for PE firms to demonstrate their resilience and adaptability.

 “This adjustment period also offers an opportunity for PE firms to enhance operational efficiencies and strengthen their portfolio companies’ competitive edge,” he said. Middle-market companies, while less able to lobby for tariff mitigation compared to large corporations, can pivot more quickly due to their agility, presenting unique opportunities in a changing landscape.

Indeed, in this environment, agility is more valuable than size. For those firms able to adapt—through consolidation, diversification, or strategy shifts—there are openings, even as others fall behind.

Looking Ahead

As Trump’s trade strategy matures—or mutates—the future of lower middle market M&A remains murky. Yet amid the uncertainty, two things seem clear: tariffs have forced a reckoning with supply chain dependencies, and they have changed the calculus of dealmaking in America’s commercial heartland.

The segment’s resilience may well depend on how quickly it can learn the new rules. Flexibility in structure, realism in valuation, and discipline in due diligence will define the winners. In a market where confidence is as volatile as capital, those who adapt fastest may yet find fortune amid the friction.

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June 2025