Navigating M&A deals through a tariff storm

The tariffs introduced by the Trump Administration  have shocked global stock markets and are expected to have even greater impact on industrial and trading businesses, and ultimately, consumers. Retaliatory measures introduced by other major economies are likely to exacerbate an already deeply challenging situation.

Nevertheless, M&A is a resilient beast. Deal teams, armed through recent COVID experiences, will need to apply the ingenuity and lateral thinking required to close deals in ways, which protect concerned parties against the Tariffs.

In this article, we explore:

• what exactly is caught by the Tariffs (and what is not);
• the kinds of businesses which are likely to be impacted;
• how deal teams will need to reshape their approach to due diligence in light of the Tariffs; and
• the kinds of solutions that deal teams can consider applying to impacted deals, including purchase price adjustment mechanisms, retentions/deferred consideration, earn-outs and MAC clauses.

So what is caught by Trump’s Tariffs?

The new Tariffs have imposed an additional duty on nearly all goods being imported into the US, starting at a 10% base rate and increasing to up to 50% for certain countries globally. An ad valorem duty of 10% applies to goods coming from the UK and Canada; 20% applies to goods coming from the EU; 24% to those from Japan; 31% to those from Switzerland; and initial 34% (later revised to 84%) to those from China. The Executive Order, with a full list of the countries affected in Annex I, can be found here: Regulating Imports with a Reciprocal Tariff to Rectify Trade Practices that Contribute to Large and Persistent Annual United States Goods Trade Deficits – The White House.

And what is not? 

Certain goods are exempted from the Tariffs in a lengthy Annex II to the Executive Order, comprised mainly of minerals, pharmaceuticals, steel and aluminium (although other tariffs may apply instead for certain goods).  The Tariffs should not directly affect the cost of goods wholly made and sold outside the US.  There could, however, be an indirect impact on businesses and consumers, which we discuss further below.

It further appears that services (e.g. intellectual property rights, professional services, etc.) are not caught. This article therefore focuses solely on physical goods.

What businesses are likely to be impacted?

At this stage, it appears the Tariffs will most directly impact businesses with material exposure to the US, such as:

• groups with material US subsidiaries;
• businesses with key customers based in the US serviced from abroad; and
• businesses selling products containing raw material or components manufactured in or supplied through the US.

This latter group has the potential for the broadest direct impact, and potential retaliatory tariffs could expand this further still.

For concerned businesses, the Tariffs may materially reduce the group’s revenues, increase costs of production (thereby reducing profitability) or perhaps cut out access to certain markets entirely. The full impact of these measures cannot be known at this stage. As a result, valuation of businesses through conventional means becomes especially challenging.

So what impact does this have on teams negotiating M&A transactions?

The most obvious impact is on the price a buyer is willing to pay for a business.

Traditionally, purchase prices are determined through various means, but a core component will be the target’s historical financial performance and future normalised projections. For impacted businesses, buyers can no longer rely on past performance or future projections based on past performance without considering the short, medium and long term impact of the Tariffs.

Due diligence: taking a closer look under the hood

Buyers will now need to carry out enhanced due diligence on supply chains and customer arrangements.

It may help to illustrate this using an example. Let us imagine a situation of a buyer based in the UAE seeking to acquire a consumer products company based in Spain (i.e. the Target), which manufactures and sells kitchen equipment (i.e. Products) assembled in the Target’s facilities in Spain. The Products contain key components (i.e. the Components) manufactured in the US by a Component supplier (i.e. Supplier). Let us further assume that the raw materials used by Supplier to manufacture the Components are raw materials imported from Mexico and Brazil.

The Tariffs will impact the cost to the Supplier of purchasing the raw materials. In turn, this will impact the ability of the Supplier to supply the Components at the same price as pre-Tariffs. The Supplier will likely pass the Tariff impact on to the Target, which means the Target’s cost of production will increase; the Target’s sales price, volume and strategy will be impacted; and future prospects of the Target are depressed.

So, when considering businesses impacted by Tariffs, key issues to explore will include –

• the origin of materials used in the manufacture of products sold by the target business, traced back to raw materials:
  • are they generated in the US or pass through the US?
  • what impact do the Tariffs have on those products, and the overall cost of production?
  • how sustainable are the manufacturing facilities/suppliers in the US? Is there a risk of those manufacturers/suppliers becoming insolvent or scaling back production?
  • are the materials replaceable with materials from territories with lower or no tariff levels?
  • to what extent are other areas of the target business impacted (e.g. has the target committed to any onward supply agreements at pre-agreed volumes or prices, which may now be challenging to meet?)
• for businesses with manufacturing/production facilities in the US:
  • can those businesses sustain volumes and performance in the short/medium term? What is “Plan B” in case those facilities close down?
  • have those businesses committed to arrangements with customers or suppliers, which may now be impossible to meet?
  • can those manufacturing operations be moved to other territories?
• for businesses selling products to customers in the US:
  • to what extent will those sales be impacted by the Tariffs?
  • can the target pass the cost of tariffs onto those customers, or will the business need to absorb the Tariffs through lower prices to maintain sales volumes?
  • are there any long-term commitments with both volume and pricing terms, which could become challenging to meet as a result?
• overall, how important to the Target are the elements that carry US exposure, and can they be ringfenced or even carved out of the group?

Outside the above considerations, there may be indirect issues to consider concerning the secondary impact on public equity markets and forex.  

Clearly, the impact of the Tariffs could be wide ranging and will need to be assessed on a case-by-case basis with a close eye on the latest economic and legal information available at the relevant time.

In addition, for deals involving W&I insurance, if W&I underwriters can be persuaded to accept any risk based on the Tariff impact (and that is an active debate at the time of writing), the underwriters will likely insist on detailed diligence into key areas such as those outlined above.

Terms of sale and purchase agreements (SPAs)

It is reasonable to expect that for the majority of impacted transactions, buyers will reduce their valuations and may consider structuring transactions to hedge against the downside impact of the Tariffs.

For deals that have not yet been signed but which have exposure to the Tariffs, the parties could slow down the deal time line so the SPAs are signed from a more informed position (and perhaps facilitating the parties negotiating some of the provisions below).

Beyond this, there are various levers available to deal teams, which can help accommodate some of the potential impact of the Tariffs.

Purchase price adjustments

An obvious solution is to structure the purchase price to accommodate the financial impact of the Tariffs. Purchase price adjustments based on a completion accounts procedure are a standard feature of M&A deals already, and the use of these mechanisms (compared with fixed price or locked box) is expected to increase.

A completion-accounts mechanism will enable the buyer to build the impact of the Tariffs into the purchase price, to the extent the impact manifests in a reduction in the net working capital or asset (or both) of the target business at completion.

A buyer, however, should consider the overall impact of the Tariffs on the normalised EBITDA of the group, which was used when setting the original Enterprise Value used to arrive at the purchase price. The impact here could be significantly greater as Enterprise Values are often arrived at by applying multiples to a target group’s normalised EBITDA. Hence, any negative impact should also be multiplied. For example, if that normalised EBITDA would be reduced by USD 5 million as a result of the Tariffs on a deal using a 7x multiple, then the buyer would be overpaying by USD 35 million unless an adjustment can be built in.

The question remains: will deal teams include bespoke line items in completion accounts to accommodate this issue?  

In the recent CMS European M&A study, the use of completion accounts mechanisms in SPAs in Europe increased modestly to 48% of all deals in 2024.^[1] Completion accounts are therefore absolutely standard mechanisms for SPAs, but negotiating bespoke line items into these structures may prove complicated. Unless they are drafted carefully, there is a risk that the parties are unable to agree on the methodology to be adopted.

Retentions or deferred consideration

While retentions are more prevalent for transactions up to EUR 100 million, they also feature in larger deals.^[2] In the context of the Tariffs, we anticipate the use of retentions will increase. 

Retentions are commonly used as security for the buyer against potential warranty/indemnity claims the buyer may have against the sellers of a business. They can, however, also be used to protect a buyer against other situations of uncertainty. This carries the risk of potential overpayment by the buyer. For example:

• If a definable aspect of a target business suffers as a result of the Tariffs, a retention amount equal to the value ascribed to that part of the business (or a negotiated amount representing that risk) could be built into the SPA. At an agreed time after completion, the parties can then assess the final impact of Tariffs on that business unit and the value ascribed to it as a result, and based on that, determine how much (if any) of the retention is released and to whom; or
• If the impact is not isolated, but has potential wider group impact, the parties could negotiate a wider retention based on the overall impact of the tariffs on the target group.

Earnouts

Earnouts are a reasonably common feature of M&A terms already (present in 25% of the deals in Europe).^[3] Earnouts allow buyers and sellers to bridge valuation gaps, where the target business has achieved certain business milestones after completion, the buyer would pay the sellers an additional amount of purchase price.

Earnouts are most commonly structured on the target achieving EBITDA targets (47% of deals in Europe) and assessed over a 12-to-24 month period after Completion (31%).[4] With earnouts already frequently based on EBITDA milestones and calculated over a longer timeline, these provisions could comfortably be repurposed to enable the buyer to hedge the transaction against potential downside impact of the Tariffs on the EBITDA of a target business.

MAC clauses

For risks that cannot be adequately covered through purchase price adjustment mechanisms, one additional remedy may be the use of material adverse change (MAC) clauses, assuming that such a clause is already included in the relevant SPA or can be negotiated into the SPA prior to signing.

A MAC clause is a provision negotiated into certain transactions to protect the buyer of a business during the period between signing the SPA and completing the deal. It allows the buyer to withdraw from the transaction if something occurs during this period that significantly affects the value of the target business to the buyer.

If it turns out that tariffs will significantly impact the value of a target business, a well-drafted MAC clause may give the buyer the right to walk away or, more commonly, use the clause to renegotiate the financial terms of the SPA.

With this issue so prominently in the minds of deal makers now, sellers will take the position that the impact of Tariffs should be foreseeable and assessable now, in advance of an SPA signing, which means no MAC clause should apply. On the other hand, buyers may quite reasonably take the view that this is unlikely to be the end of the story, that retaliatory tariffs are highly likely, and the overall impact on target businesses (including cost and viability of supply chains, as illustrated above) cannot be assessed at this stage.

In light of this, any MAC clause introduced into SPAs will need to state specifically that it applies in relation to the impact of the Tariffs, retaliatory measures, and the overall impact of this environment on the target business in order for the MAC to be effective. It will be a challenging clause to negotiate, but for many buyers this will be essential.

In CMS’s European M&A study, MAC clauses were analysed in prescient detail: “The decline in the use of MAC clauses [in Europe] in 2022 (14%) and 2023 (10%) was reversed in 2024, climbing back to 14% of all transactions. Against the background of multiple crises worldwide, this decrease in the use of such clauses in 2022 and 2023 was surprising, since it might have been expected that the agreement of such clauses would increase with the increased volatility of the global situation. One explanation for the 4% increase of MAC clauses in 2024 would perhaps be the impact of geopolitical tensions and new political leaders in various countries.”  

Interestingly, US-style deals used MAC clauses in 98% of all deals, compared with just 14% in Europe. It seems our US friends are accustomed to more volatile economics. In the Middle East, however, MAC clauses follow a similar path to Europe and are only seen in relatively rare cases.

So what comes next?

• For deals that have not yet been signed, a slower timetable is expected, allowing parties to proceed from a more informed position. This could result in a similar situation to the COVID/post-COVID era where investors stockpiled capital for six months before opening the floodgates to an M&A boom.
• There may be an increased use in completion accounts (including potentially specifically negotiated line items based on Tariff impacts), retentions, earnouts, and an increased use of MAC clauses in deals across Europe, the Middle East and elsewhere.
• For deals now between signing and completion, those buyers with MAC clauses in their SPAs will be breathing a sigh of relief. This, however, may well also result in a spate of litigation over whether the Tariffs and impact of the Tariffs on the target business did in fact trigger the MAC clause. That will be something specific to each transaction, and it would be surprising if any existing MAC clause specifically covered the Tariff scenario.
• Those without MAC clauses will be considering the impact of the Tariffs on the Target and could potentially seek “back door MACs” or ways of exiting or renegotiating SPA terms using warranties repeated at completion (the breach of which may give the buyer a walk-away right), conditions to completion, gap controls and force majeure clauses. Again, this is likely to trigger a spate of litigation for buyers who seek to exit or renegotiate an SPA in this way.
• For deals that have signed and already include earnout arrangements or retentions, parties will be considering whether the impact of the Tariffs changes the payout provisions under those clauses. Those expecting payouts under the clauses will not expect to carry the burden of the target business suffering from the Tariffs, which would reasonably be considered out of their area of control. On the other hand, buyers may be looking at the drafting carefully to consider how it might claw back payments for a business for which, it now appears, it has overpaid.
• W&I underwriters are also likely to require enhanced due diligence before agreeing to coverage on items that are sensitive to the impact of Tariffs. Extensive debate can be expected over exclusions around Tariffs and potentially regarding bolt-on coverage products coming to market.

For guidance on how to navigate M&A deals during this volatile period of US tariffs, contact your CMS client partner or either of the authors.

^[1] Page 20, CMS European M&A Study

^[2] Page 71, CMS European M&A Study

^[3] Page 28, CMS European M&A Study

^[4] Pages 29 and 30, CMS European M&A Study