Pent-up demand may lead to recovery later this year
Buyers and sellers in many M&A deals are in a “wait-and-see” mode in the highly uncertain tariff environment that dealmakers are facing in the first half of 2025.
Grant Thornton professionals expect a decrease in deal volume in the near term — if they are not already experiencing it — to be followed by an upswing later this year as pent-up demand inspires a higher appetite for deals, assuming greater stability in the market.
“Uncertainty is hurtful to any M&A environment because it makes it difficult to predict the future earnings of a business, and therefore it’s a challenge to determine the valuation of the asset,” said Grant Thornton Transaction Advisory Principal Eric Young.
Young said some deals that are currently in progress are stalled in a phase after the submission of a letter of intent but before the deal closes. Buyers and sellers alike are waiting to see the effects that tariffs will have on the assets involved in their deals. In some cases, bankers are beginning preparations for a sale process but holding off on going to market until they get clarity on the environment.
When economics return to sound footing after this period of uncertainty, buyers and sellers will evaluate the deal fundamentals and decide whether to move forward, Young said. Grant Thornton Transaction Advisory National Managing Partner Elliot Findlay expects deal volume to increase only after buyers have seen some period of stable performance showing how businesses reach a new normal in the new environment.
Greater certainty, coupled with the substantial amount of dry powder that private equity firms have available to spend, could create a more fertile environment for deals.
“Expectations for a recovery in M&A volume are centered on pent-up demand and the expectation that this was going to be a big year for M&A,” said Grant Thornton Transaction Advisory Managing Director Max Mitchell. “If tariffs are temporary or permanent, at least we will know what they look like when they’re in place, and buyers and sellers will want to see financial results under these conditions and how businesses have adjusted.”
A moderation of market instability could be the catalyst for the acceleration in M&A activity that was anticipated for 2025, prior to the announced tariffs. Meanwhile, in the current environment, companies with all their costs and sales located in the United States may be more attractive to buyers because of their lack of foreign commitments and tariff exposure.
Tariffs dampen optimism
The year started with high expectations for dealmaking after M&A volume was moderate in 2024. The uncertainty of the pre-election period was replaced by optimism about the direction the new administration would take related to the business environment.
Predictably, Grant Thornton Transaction Advisory professionals saw pre-deal activity ramp up early in the year in preparation for transactions. But then, the tariffs prompted new worries for buyers and sellers.
“We’ve seen a significant amount of pre-deal activity, but it hasn’t manifested in a significant increase in closed deals yet because of the uncertainty,” Young said. “Terms of deals were developed and there was a lot of work going on, but it didn’t result in a lot of deal completion.”
Part of the pause in deal completion resulted from the effects tariffs can have on supply chains, costs and customers. Buyers and sellers were asking:
- Can or should tariff costs be passed through to customers?
- Will sales volumes decrease if customers are presented with rising costs due to tariffs?
- Can new sourcing options be implemented to reduce or eliminate the costs related to tariffs?
All these questions threw M&A valuations into doubt as pessimism about the economy grew. The anxiety has been twofold:
- The tariffs present a challenge in their own right. “Overall, tariffs are thought to be generally inflationary,” Young said. “If consumers only have so much money, how do they divert their spending? There likely is an effect here that flows through the economy to the end consumer.”
- The administration’s frequently changing tariff announcements have made it difficult to plan. “Companies can’t adapt to their situation until they know whether these tariffs are going to be fully in effect — and which countries and industries they will affect,” Mitchell said.
In these conditions, Grant Thornton’s strategic guidance to companies is to use proactive scenario planning to consider the impact of tariffs through multiple lenses.
“Business leaders need to consider customer- and product-specific revenue and margin impacts associated with tariffs and whether or not they should be passed on to customers,” said Grant Thornton Business Consulting Principal Jonathan Eaton. “Without exemptions, there are few options available to preserve margins unless the tariffs are passed on to customers in the form of price increases. But a comprehensive business continuity planning process will include the essential scenario planning that is necessary to make fact-based decisions. The best solution will usually require a dynamic pricing approach and the use of variable order fulfillment models, with the guiding principle being overall strategic significance of the client and how they compare to other customers within the segmentation profile.”
Companies that are pursuing deals also can implement strategies that can remove some of the uncertainty related to M&A.
M&A strategies for an uncertain economy
In past uncertain economic environments, dealmakers have decreased purchase prices and increased earnout mechanisms in transactions.
“Buyers can pay a base amount that they’re confident in and then develop an earnout compensation structure based on the business results in years following the acquisition,” Young said. “We might see that structure used more in the coming months as that has been a common approach in past uncertain cycles.”
Deeper due diligence — particularly related to the supply chain — also can provide critical information for deals.
“Buyers and sellers both should be talking with supply chain professionals as part of the due diligence process,” Young said. “They should be evaluating the sources of products, the cost and timeline for procuring supplies, and potential alternative sources available to the business that’s involved in the deal.”
Transaction structuring will also be affected by tariffs. Tariffs are prompting companies to revisit the efficiency of their global operating models. Companies may discover that their current supply chains are suboptimal when the new tariffs are factored in. Optimal global structuring now requires a multi-factor approach that balances corporate tax, tariffs, value added taxes and logistics.
Mitchell said many companies preparing for deals also are conducting deeper HR diligence related to the Trump administration’s crackdown on immigration. Buyers and sellers are looking closely at independent contractor classifications, visas, and the general availability of labor in light of the government’s immigration enforcement efforts.
Another area that demands extra attention is commercial due diligence.
“How is consumer demand being affected in the customer base right now? Can tariff costs be passed along to customers in the form of price increases? Those should be areas of increased focus for buyers and sellers,” Young said.
As targets in the U.S. become more attractive and bidding processes more competitive amid a tight capital environment, we anticipate prospective buyers sharpening their pencils on diligence to best position themselves to win, while allocating capital judiciously. In addition to leaning on third-party advisors to support deeper diligence, buyers may increasingly consider third-party consultation in the form of independent pre-transaction valuation modeling to substantiate internal investment theses and assess the impact of diligence findings real-time, as well as fairness opinions depending on the proposed form of transactions.
This extra scrutiny can give dealmakers comfort in the next few months. And in the long-term, with more stability there’s a chance that pent-up demand, private equity dry powder, and a readiness to close deals that are in progress will lead to a more robust environment for M&A.
“These deals are going to happen,” Burgess said. “They’re just going to get pushed back until buyers and sellers have a more stable market to transact in.”
Tariff effects by industry
Recent tariffs will have different effects on M&A in various industries. The table below provides a brief look at these industry-specific implications.
Contacts:
Eric Burgess
Principal, Transaction Advisory Services
Grant Thornton Advisors LLC
Eric is a Partner in our Transaction Services practice. He has developed extensive transaction experience serving as an adviser to multinational companies, middle market private equity firms and local corporations. He has been involved in more than 400 transactions with more than 100 different private equity investors, multinational companies, lenders and strategic corporate acquirers. Eric has significant M&A experience across many industries.
Dallas, Texas
Industries
- Healthcare
- Manufacturing, Transportation & Distribution
- Transportation & Distribution
- Energy
- Hospitality & Restaurants
Service Experience
- Transaction Advisory
Jonathan Eaton
Principal, Business Consulting
Grant Thornton Advisors LLC
Jonathan is a Principal in the Operations & Performance practice.
Charlotte, North Carolina
Industries
- Manufacturing, Transportation & Distribution
- Technology, Media & Telecommunications
- Energy
- Retail & Consumer Brands
Service Experience
- Advisory Services
- Business Consulting
Maxwell G. Mitchell
Managing Director, Transaction Advisory Services
Grant Thornton Advisors LLC
Max leads Grant Thornton’s Purchase Agreement Advisory Practice, having established the service offering for Grant Thornton in February 2019. Max previously performed the same work for Grant Thornton UK. Max has fourteen years of experience providing financial and accounting services to clients.
Chicago, Illinois
Industries
- Retail & Consumer Brands
- Services
- Transportation & Distribution
- Construction & Real Estate
- Technology, Media & Telecommunications
- Healthcare
- Life Sciences
- Manufacturing, Transportation & Distribution
- Hospitality & Restaurants
Service Experience
- Advisory Services
Christopher P. Schenkenberg
National Tax Leader, Corporate Tax Solutions
Grant Thornton Advisors LLC
Chris Schenkenberg has extensive experience working in M&A, conducting tax due diligence reviews for both financial and strategic clients. He also has significant technical knowledge in acquisition structuring, divestiture planning and tax accounting methodologies.
Chicago, Illinois
Industries
- Manufacturing, Transportation & Distribution
- Technology, Media & Telecommunications
- Retail & Consumer Brands
Service Experience
- Tax Services
Krystn Hammond
Principal, CFO Advisory Services
Grant Thornton Advisors LLC
Krystn leads the valuation practice in New York for external (non-audit) clients. She has over 15 years of experience advising pharmaceutical and life sciences clients on transactions and tax restructurings, including acquisitions, divestitures, spin-offs, and intellectual property migrations.
New York, New York
Industries
- Life Sciences
Service Experience
- CFO Advisory
- Advisory Services
- Valuation and Modeling
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