The implementation of tariffs under President Trump's administration has introduced significant complexities for privately-held, middle-market companies. These businesses, typically characterized by annual revenues ranging from $10 million to $1 billion, form a crucial segment of the U.S. economy. The imposition of tariffs has the potential to affect various aspects of their operations, from cost structures to market dynamics.​
Impact on Supply Chains and Cost Structures
Many middle-market companies rely on global supply chains for raw materials and components. Tariffs on imported goods increase procurement costs, compelling these companies to either absorb higher expenses or pass them on to consumers, potentially reducing demand. This scenario can compress profit margins, a critical factor in business valuation.
As profit margins shrink, the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) likewise decreases, leading to lower valuation multiples.​ Companies that are unable to efficiently manage these cost increases may face reduced competitiveness, making it difficult to sustain long-term growth and profitability.
Additionally, businesses that rely on foreign suppliers may seek alternative sources, requiring costly transitions and logistical adjustments that further impact financial performance.
Market Uncertainty and Investment Hesitancy
The unpredictable nature of trade policies introduces significant uncertainty into the business environment. This uncertainty can lead to reduced investment in expansion and innovation, as companies may adopt a cautious stance, delaying capital expenditures and strategic initiatives. Such stagnation can hinder growth prospects, negatively impacting a company’s value.
Potential investors or acquirers may perceive these companies as higher-risk investments due to the volatile operating environment, leading to more conservative valuation assessments.​ Furthermore, lenders may tighten credit availability, making it more challenging for businesses to secure financing for growth initiatives, thereby compounding the negative valuation effects.
Mergers and Acquisitions (M&A) Activity
The tariff landscape has a notable influence on M&A activity within the middle market. Uncertainty surrounding trade policies can lead to a slowdown in deal-making, as both buyers and sellers may struggle to agree on valuation terms amidst fluctuating market conditions.
According to Bloomberg Law, new U.S. tariffs and escalating trade tensions have contributed to a subdued global deals market, with global deal totals through February 2025 reaching their lowest point in at least five years. Companies engaged in M&A transactions may need to negotiate more complex deal structures, incorporating contingency clauses to account for the potential financial impact of future tariff changes.
Additionally, businesses facing higher operational costs due to tariffs may become less attractive acquisition targets, leading to decreased deal activity in tariff-sensitive sectors.
Private Equity Considerations
Private equity firms, which are significant players in the middle market, face challenges in navigating the tariff-induced landscape. The increased costs and operational uncertainties can lead to discounted valuations for target companies, affecting investment strategies. Firms may need to conduct more thorough due diligence, extend deal timelines, and incorporate protective measures such as earn-outs or contingent payments to mitigate risks associated with tariffs.
Additionally, portfolio companies may require strategic realignments, including renegotiating supplier contracts or diversifying revenue streams, to maintain profitability and sustain investor confidence.
Sector-Specific Impacts
The effect of tariffs varies across industries within the middle market. Manufacturing companies that rely heavily on imported raw materials are particularly vulnerable, facing increased production costs that can erode profit margins. Conversely, companies less reliant on imports or those able to source domestically may experience a competitive advantage, potentially enhancing their valuations.
Investor Sentiment and Market Volatility
Trade tensions and tariff announcements contribute to market volatility, influencing investor sentiment. Increased uncertainty can lead to higher risk premiums demanded by investors, resulting in lower valuation multiples for middle-market companies.
This environment necessitates robust risk management strategies to maintain investor confidence and protect valuations. Companies that proactively implement strategies to navigate tariff-related challenges may be better positioned to maintain favorable investor perceptions, allowing them to secure necessary funding and sustain market competitiveness.
How to Strategically Respond and Adapt
To mitigate the adverse effects of tariffs, middle-market companies can explore strategies such as diversifying supply chains, investing in domestic production capabilities, and exploring new markets less affected by trade tensions. Proactive adaptation can help preserve profit margins and sustain valuations in a challenging economic landscape. Businesses that develop agile operational strategies, such as leveraging technology to enhance efficiency or entering strategic partnerships to share tariff-related burdens, may better withstand economic fluctuations and sustain long-term growth.
While President Trump's tariffs may have introduced a complex array of challenges for privately-held, middle-market companies, those companies that proactively adapt their strategies, whether by restructuring supply chains, adjusting pricing models, or seeking new markets, may mitigate some of these risks and position themselves for long-term success.