Executive Summary
While 2025’s unprecedented tariff volatility has impacted M&A deal volume, high-quality companies with tariff mitigation strategies in place or that are in tariff-insulated industries are commanding premium valuations in a thin market. Business owners who can demonstrate competitive advantages from current trade policies — or minimal supply chain exposure — should consider moving quickly, as the post-uncertainty recovery is expected to exceed the post-COVID M&A boom. The key is company-specific analysis rather than broad market timing, as prepared sellers can capitalize on buyers’ urgent need for quality investments.
From Bullish Optimism to Market Turbulence
Scott Mashuda, founding partner at REAG and seasoned M&A professional, recalls the stark contrast between January expectations and current realities. “Coming into 2025, we were sitting there extremely bullish on what this year would look like in terms of M&A,” he explained during a recent Exit Planning Institute webinar. With an estimated $2 trillion in dry powder sitting on private equity sidelines and buyers and sellers on relatively even footing, the stage seemed set for a robust year of deal activity.
The optimism was well-founded. Private equity firms were experiencing some of the longest hold times in history, and industry professionals anticipated a significant market shift from add-on driven transactions to platform acquisitions by mid-2025. The expectation was that cross-border M&A would also increase meaningfully, particularly in manufacturing, as international companies sought to establish U.S. footholds under the new Trump administration.
While these tariffs introduce new complexities to deal-making, prepared buyers and sellers can still find opportunities in this shifting landscape.
The Tariff Tsunami
Starting January 26th, a cascade of tariff announcements began reshaping the economic landscape. What followed was a dizzying array of policy changes that would make even seasoned market observers’ heads spin:
- 25% tariffs threatened on Colombian imports, followed by retaliatory measures
- Executive orders imposing 10% tariffs on Chinese imports and 25% on Mexico and Canada
- Steel and aluminum tariffs reaching 25 – 50%
- Tariffs on auto imports, with rates eventually climbing to 25%
- A complex web of reciprocal tariffs, exemptions, and escalations
By April, tariff rates had reached staggering levels, with some Chinese imports facing 145% tariffs while the U.S. implemented a baseline 10% tax on nearly all imported goods. The frequency and magnitude of these changes created exactly the kind of uncertainty that markets despise.
The Data Tells the Story
When Q1 2025 M&A data was released in May, it revealed telling insights into market behavior. Deal volume plummeted to just 59 transactions in Q1, compared to 98 in Q4 2024 — a dramatic decline that would annualize to approximately 240 deals for the year, significantly down from previous years.
Interestingly, the data suggested that many Q4 2024 deals had been pulled forward for tax purposes, artificially inflating 2024 numbers while setting up Q1 2025 for disappointing results. Even more concerning, the Q1 data didn’t fully reflect the tariff turmoil that began in earnest in February, meaning Q2 data will likely show even more dramatic declines.
Despite the volume challenges, valuations remained remarkably stable. Companies in REAG‘s target market of $10 – 250 million in revenue maintained strong multiples, with debt-to-EBITDA ratios actually improving to 4.2x in Q1, indicating that high-quality deals were still getting done.
Industry Winners and Losers
The tariff environment has created clear winners and losers in lower middle market M&A. Industries with minimal tariff exposure have become particularly attractive to private equity buyers seeking platform investments:
Thriving Sectors:
- Business services (up a full turn in valuations)
- Healthcare services (up over a turn)
- Residential and commercial service companies
- Professional services and financial services
Challenged Sectors:
- Manufacturing (already showing declining multiples before tariff uncertainty)
- Technology (facing headwinds)
- Any industry heavily dependent on international supply chains
The COVID Parallel and Future Outlook
The current tariff environment bears striking similarities to the COVID-19 market disruption, with both periods characterized by delayed decision-making and reduced transaction volume as uncertainty grips the market.
However, there’s a critical distinction this time around: management teams have experience. The executives running today’s companies largely navigated their businesses through the COVID crisis, giving them a proven playbook that didn’t exist during the pandemic’s early days.
This experience means companies are better positioned to maintain profitability during uncertain times, having already learned to adjust pricing more quickly and protect margins more effectively. Based on this enhanced operational resilience, the post-tariff recovery is expected to be even more dramatic than the post-COVID boom that characterized 2021.
Strategic Opportunities in Uncertain Times
While broad market sentiment suggests waiting out the uncertainty, savvy business owners and advisors recognize that opportunities exist for those willing to look beyond the headlines. Companies that can leverage the current tariff environment to their advantage—such as those sourcing from non-Chinese suppliers while competitors face China tariffs—may find themselves in surprisingly strong negotiating positions.
The team at REAG has been closely monitoring market dynamics with access to industry-specific data and regional and global trends across the lower middle market.
The key insight is that M&A guidance has become highly company-specific. “You can’t paint this market with a broad brush,” Mashuda emphasizes. Success requires careful analysis of individual supply chains, competitive positioning, and tariff exposure.
Preparing for the Wave
For exit planning professionals and business owners, the message is clear: preparation and timing matter more than ever.
With high-quality companies commanding premium valuations in the current thin market, those ready to transact can still achieve excellent outcomes. However, once the uncertainty subsides and deal volume returns, buyers will become increasingly selective.
The M&A market will recover—the question isn’t if, but when. Those who prepare now will be best positioned to capitalize on the significant opportunities ahead.
Next Steps With REAG: Your Dedicated Investment Banking Experts
M&A is often misunderstood as a single event, but in reality, it’s a complex process typically spanning 9-12 months or more. Working with a trusted advisor, this process moves through several key stages: initial preparation, buyer identification and outreach, negotiation, due diligence, and finally, closing. Each stage requires careful navigation and expertise to ensure success.
If you’re ready to unlock your company’s true value, reach out to REAG today.
