Tariffs and M&A Strategy: What Business Owners Need to Know

As leader of Redpath's Advisory Services practice, I speak regularly with business owners evaluating how potential trade policies could affect their M&A plans. The media tends to focus on macroeconomic impacts, but businesses also need practical guidance on how tariffs influence deal strategy, timing, and value.

Strategic Positioning: Domestic vs. International Exposure

Trade policy shifts affect companies differently, based on their supply chain structure and market position. Companies must evaluate their exposure across the entire value chain–from raw material sourcing through final customer delivery. 

Organizations operating primarily within U.S. borders–sourcing materials and selling domestically–often face less direct impact from tariff changes. In fact, some American-made businesses may even benefit as international competitors experience increased costs. However, even companies with primarily domestic operations need to understand potential indirect effects through supplier and customer networks.

For businesses with international supply chains, particularly in electronics manufacturing where components often come from China, we analyze several factors:

• Component cost impact on margins: This includes evaluating the percentage of materials sourced internationally, identifying which components face potential tariffs, and calculating the direct impact on product-level and overall company margins.
• Ability to pass through cost adjustments to customers: We examine existing customer contracts, historic pricing, competitive dynamics, and customer concentration to assess cost pass-through potential. This includes analyzing price adjustment clauses and customer negotiation history. A lot can be learned from our last round of tariffs and supply chain challenges.
• Market share opportunities if competitors face higher costs: Understanding competitor supply chains and cost structures helps identify potential market share gains. Companies with primarily domestic supply chains may find competitive advantages.

Take the construction industry, for example. These companies may need to address potential Canadian lumber tariffs, along with existing pressures from interest rates and labor costs. The interconnected nature of global supply chains means that even companies with limited direct international exposure must carefully evaluate their strategic position. 

Understanding both direct and indirect effects helps inform strategic planning and supports more effective negotiations with buyers and sellers in M&A transactions.

Impact on Deal Value

Trade policy changes also could affect company valuations in M&A transactions. Private equity firms and strategic buyers now conduct extensive analysis of supply chain exposure during due diligence, often developing sophisticated models to evaluate various scenarios.

This heightened scrutiny reflects growing awareness that tariffs can impact not just direct costs, but also competitive dynamics, customer relationships, and long-term strategic positioning. Understanding how buyers approach this analysis helps sellers better prepare for negotiations and identify opportunities to protect or enhance value. They evaluate:

• Direct cost impacts on margins: Buyers analyze potential margin compression scenarios under various tariff levels. This includes reviewing product-level profitability, material costs as a percentage of revenue, and the timing of potential impacts.
• Pricing power with customers: Due diligence focuses on historical pricing trends, contract terms, customer concentration, and competitive dynamics that affect the ability to pass through cost increases.
• Competitive positioning and market share analysis: Buyers assess relative supply chain exposure compared to competitors, including geographic sourcing diversity, supplier relationships, and potential competitive advantages under new trade policies.
• Operating scenarios under various trade policies: Comprehensive scenario analysis examines the combined effects of tariffs, operational changes, pricing adjustments, and potential mitigation strategies on company valuation.

This detailed analysis often creates gaps between buyer and seller value expectations, as each party may assess risks and opportunities differently. Successfully bridging these gaps requires thorough preparation, clear communication of mitigation strategies, and realistic assessment of market conditions. 

Making Strategic Decisions

Business owners facing potential trade policy changes often wonder whether to proceed with or delay transaction plans. While each situation requires careful analysis, taking a wait-and-see approach can mean missing opportunities. 

Instead, we recommend developing a comprehensive understanding of your position and potential responses: 

Map Your Position

• Document supply chain exposures: Create comprehensive supply chain maps showing key components, suppliers, countries of origin, and potential tariff exposure. Consider both direct materials and critical indirect supplies that could affect operations.
• Analyze competitor vulnerabilities: Research competitive supply chain structures through industry analysis, public filings, and market intelligence. Understanding relative exposure helps identify potential advantages or risks.
• Assess customer pricing flexibility: Review customer contracts, pricing history, and market dynamics to understand cost pass-through potential. Consider customer concentration risk and contract renewal timing.

Build Contingency Plans

• Identify alternative suppliers: Research and evaluate domestic and international supplier options before they become necessary. Consider supplier capabilities, quality requirements, minimum orders, and qualification timelines.
• Model pricing scenarios: Develop financial models examining various tariff levels, timing of implementation, and potential response strategies. Include both cost mitigation and revenue impacts.
• Plan operational efficiency adjustments: Evaluate opportunities for process improvements, automation, or redesign that could offset cost increases. Consider implementation timing and capital requirements.

Prepare Your Story

• Quantify potential impacts: Create clear analysis showing exposure levels, mitigation opportunities, and expected financial outcomes. Focus on key metrics buyers will evaluate during due diligence.
• Document mitigation strategies: Develop detailed implementation plans showing specific actions, timing, resource requirements, and expected results. Include both short-term responses and long-term strategic changes.
• Build credibility with buyers: Prepare comprehensive documentation showing thorough analysis, concrete plans, and realistic timelines. Focus on demonstrating proactive management and strategic thinking.

The Redpath Advantage

At Redpath, we take a hands-on approach to complex M&A transactions:

• For sellers, we quantify supply chain exposure, develop mitigation plans, create compelling buyer narratives, and structure deals appropriately. 

• For buyers, we model different outcomes and help strategically position organizations on integrations, strategy, operations, financials, and taxes.

Looking Forward

While some tariffs, particularly with China, may persist, others likely serve as negotiating tools. Rather than watching from the sidelines, successful businesses focus on preparation: understanding specific exposures, developing action plans, documenting strategies, and engaging experienced advisors.

The M&A market remains active, with well-prepared companies still executing successful transactions. Thorough preparation and experienced guidance help navigate evolving trade policies.

Taking Action

If you are considering a transaction, start planning now. Understanding your position and options supports informed decisions about timing and approach. Our team at Redpath brings deep experience helping clients navigate similar challenges.

Contact us to discuss how we can help position your business for a successful transaction.