Potential impact of tariffs for prospective buyers in M&A

There are many headlines about the impact of tariffs and what the implications might be on the economy – among them, taxes and inflation. One area prospective buyers and diligence professionals should be wary of is the stockpiling effect resulting from both the real and perceived threat of tariffs on businesses. Specifically, certain companies may have preemptively purchased material ahead of formal tariff announcements.

This would likely impact businesses tied to either specific sectors – such as manufacturing (e.g., automotive OEMs and suppliers), agriculture, and consumer products – or those who have significant portions of their supply chains tied to sourcing from certain countries whereby the United States has a significant trade deficit. The countries with the largest trade deficits with the US include China, Mexico, Vietnam, Germany, and Canada⁽¹⁾.

Stockpiling, which involves companies purchasing ahead of regular buying patterns, may distort trends by elevating inventory levels at the purchasing company while simultaneously inflating and effectively pulling ahead sales and profits at companies supplying the products. From a due diligence perspective, prospective buyers should be aware of performing diligence in these sectors, as the pull-ahead does not represent true underlying growth.

Further uncertainty arises from the lack of comparability across historical periods prior to tariffs being enacted, and the go-forward state. Additionally, previously developed forecasts and budgets for 2025 and beyond will likely need to be revisited.

Given the uncertainty with tariffs, we expect to see continued market volatility and a likely temporary pause in M&A activity for those industries most impacted as companies take stock of the situation and reassess the impact to their financials and projections.

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⁽¹⁾   Source: US Bureau of Economic Analysis and US Department of Commerce