Trump’s Tariffs: Navigating M&A in the Lower Middle Market

Executive Summary

The current tariff environment is attracting foreign buyers seeking to establish or expand their US manufacturing presence to bypass import restrictions. These international acquirers are increasingly viewing lower middle market companies as strategic entry points into the American market, adding a new dimension of buyer competition.

President Trump’s new reciprocal tariffs, including a base 10% on all countries and escalating tariffs on China, are creating significant challenges for lower middle market M&A transactions. These challenges include supply chain disruptions, complicated valuations, and potential successor liability for customs violations dating back five years. 

While these tariffs introduce new complexities to deal-making, prepared buyers and sellers who conduct thorough due diligence and implement strategic mitigation tactics can still find opportunities in this shifting landscape.

Trump Tariffs: April 2025 Update

President Trump has implemented sweeping tariff policies since taking office in January 2025, declaring a national emergency related to trade deficits on April 2. The administration describes these measures as necessary to address “non-reciprocal trade arrangements” and reduce the U.S. trade deficit, though they’ve triggered significant global economic concerns.

Key Points:

• A baseline 10% tariff on most imports from many countries went into effect on April 5, 2025.
• Most tariffs were paused for 90 days on April 8, except for those on Chinese goods.
• China faces the highest tariffs, with rates reportedly reaching up to 145% (combining previous 20% tariffs with new 125% “reciprocal” tariffs).
• Targeted tariff rates have been applied to U.S. allies: 24% on Japan, 25% on South Korea, and 32% on Taiwan.
• Canada and Mexico have special treatment – they’re exempt from the baseline 10% rate but remain subject to previous 25% tariffs related to border security issues.
• Product exemptions were expanded on April 11 to include smartphones, computers, and various electronics.
• China announced retaliatory tariffs of 34% on all U.S. goods starting April 10.
• The EU is preparing countermeasures including tariffs on U.S. consumer goods, steel, and agricultural products.
• On April 14, the Commerce Department initiated new Section 232 investigations into pharmaceuticals and semiconductors, potentially signaling further tariff actions.
• Trade experts describe this as “the single biggest trade action of our lifetime” and “a seismic shift” in global trade relations.

Economic Impact

These tariffs pose a meaningful downside risk to economic growth despite the U.S. being less trade-reliant compared to many of its largest trading partners. The average effective US tariff rate after incorporating all 2025 tariffs is now 22 ½%, the highest since 1909.

The tariffs will likely put upward pressure on inflation as U.S. importers pass on some of the increased costs to consumers.

However, there are mitigating factors: foreign manufacturers and U.S. importers may absorb part of the cost; importers may find alternative suppliers; and supply chains might be altered or brought onshore, though this requires investment and time.

M&A Implications for the Lower Middle Market

Trade policies are forcing businesses and advisers in M&A transactions to proactively assess the effect of tariffs on valuation and identify potential tariff liability.

For lower middle market deals specifically, these challenges are particularly acute due to:

1. Supply Chain Vulnerability: The IEEPA tariffs particularly affect sectors with complex supply chains, such as automotive, aerospace, pharmaceuticals, machinery, food and beverage, energy, and electronics – industries where many lower middle market companies operate as suppliers or specialized manufacturers.
2. Valuation Challenges: M&A buyers now need to carefully evaluate how tariffs will affect business value. This means checking product codes and supply chain origins as part of due diligence to understand tariff risks. These additional steps make valuing smaller market businesses even more challenging than before.
3. Liability Risks: In the United States, the concept of successor liability can, under certain circumstances, extend to asset-only purchases. This means that a buyer might inherit customs violations from the acquired company, especially if there’s substantial continuity in operations, management, or workforce. The U.S. Customs and Border Protection (CBP) has a five-year statute of limitations for most customs violations, which underscores the importance of thorough due diligence, including reviewing import records, during acquisitions.
   

Mitigation Strategies for Lower Middle Market Players

For sellers, evaluating tariff mitigation options should occur even before due diligence begins. Successfully executed tariff mitigation can become a selling point for prospective buyers. 

Key strategies include:

1. Obtaining binding rulings from US Customs and Border Protection on prospective import issues to reduce uncertainty.
2. Leveraging carve-outs from new tariffs, such as duty-free treatment for goods that are exported and then returned, or exemptions for merchandise qualifying under the US-Mexico-Canada Agreement.
3. Working out tariff-related language in agreements, such as negotiating shipping terms to mitigate liability for tariffs as “US importer of record” or allowing for price increases due to unforeseen tariffs.

Due Diligence Considerations

Buyers and investors need to carefully examine:

1. High-risk imports, particularly those that have relied on product exclusions.
2. Federal inquiries and investigations by checking records of past Customs and Border Protection requests, which could reveal pending investigations.
3. Import compliance programs to determine if proper controls are in place to prevent costly errors.

Outlook for Lower Middle Market M&A

While recession risks have risen following the aggressive tariff plans, the U.S. economy is entering this period from a position of strength after two years of above-trend growth. 

The Federal Reserve is more likely to step in to support softening economic growth and a potentially weaker labor market.

While earlier this year, the Fed indicated a slower pace of rate cuts, Chairman Powell has suggested policymakers won’t rush to offset the impact of Trump tariffs because “the economy is still in a good place.” 

The Fed’s next move remains uncertain given recent economic developments. The Federal Open Market Committee (FOMC) will convene on May 7th, 2025, to determine whether to adjust the current federal funds target rate of 4.25% to 4.50% in response to tariff-related economic pressures. 

With ongoing investigations and the possibility of even steeper duties, M&A transactions — particularly in sectors with complex supply chains—must navigate an increasingly fluid trade environment.

Where is the Lower Middle Market Headed?

For lower middle market M&A, the new tariff landscape requires heightened vigilance, more thorough due diligence, expert-led guidance to ensure creative approaches to deal structuring. While these challenges may slow transaction timelines and complicate valuations, they also create opportunities for well-prepared buyers and sellers who can effectively navigate the new trade environment.

Investment bankers in this space should help clients develop strategies that account for tariff impacts on cash flow, supply chains, and competitive positioning to ensure successful transactions despite the turbulent trade environment.

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. 

If you’re looking to grow through acquisition, the importance of proprietary deal flow cannot be overstated in today’s competitive M&A landscape. Access to off-market opportunities through established industry relationships and advisor networks often yields higher quality acquisitions at more favorable valuations than widely-marketed businesses, giving savvy buyers a significant advantage in identifying and securing ideal targets before they reach the broader market.

With the added complexities of Trump’s new tariff regime, having an experienced investment banking partner who understands both the technical aspects and the nuances of deal-making has never been more critical for lower middle market businesses.

Don’t let today’s trade uncertainty derail tomorrow’s deal. Partner with REAG’s experienced M&A team to turn volatility into opportunity. Reach out to REAG today.