Outlook for Dealmaking Post-Tariffs

Ted Rosen: 

Thanks for having me. It's an honor, Elana. 

Elana Margulies Snyderman: 

Absolutely, Ted. So, to kick off the conversation, tell us a little about your background and Akerman. 

Ted Rosen: 

First, my responses today are my own personal opinions and do not necessarily reflect the opinion of my firm. I'm also not expressing any legal opinions. So, as to my background, I'm a Corporate Partner in the M&A and Private Equity practice group of the New York Office of Akerman LLP. We're an Am Law 100 firm, and we are consistently ranked by PitchBook in the top 20 most active law firms in the U.S. for mergers and acquisitions. I have practiced corporate law and specifically mergers and acquisitions for over 30 years. I handle many, many sell-side M&As, as well as buy-side private equity transactions. My deals are mostly in the lower and middle market, from $20 million to $500 million in enterprise value. And I just want to say that I actually love being a transactional lawyer and helping my clients, and I'm excited to share my insights with you and your audience. 

Elana Margulies Snyderman: 

Great, Ted. So, it's definitely an interesting time to be recording this podcast on dealmaking with the recent news of Trump's tariffs, and I would love to hear a high-level outlook on what this means for the space. 

Ted Rosen: 

This is not an easy question. So, I think there are a lot of similarities between COVID-19's impact on M&A, and the current tariff situation. And there's uncertainty, right? We don't know what's going to happen with U.S.-imposed tariffs and retaliatory tariffs at this point, and it's incredibly difficult to calculate what's going to ultimately happen, but obviously there's going to be a lot of changes over time. But I am selling to two companies in the business services space with no applicable tariff implications. So, there's definitely going to be deals continuing. So, the impact of tariffs on business and M&A is industry specific. On a macro level, if we assume tariffs are inflationary, then it will become difficult for the Fed to lower interest rates, which is not good for M&A. Moreover, cross-border M&A will become even more complex as a result of reciprocal tariffs. I'm also hearing from my investment banking contacts that distressed M&A is already seeing increased volume, which makes sense since the prospects of companies, at least in certain industries, may be severely impacted by tariffs. My personal opinion is, where we end up on tariffs will be very different from where we are now. Thus, I think it is important to stay calm and to get the team together to assess the potential best- and worst-case scenarios under the proposed and then actual tariffs. Lastly, there are lots of ways to structure deals to mitigate risks for buyers, and to provide potential upside for sellers. 

Elana Margulies Snyderman: 

Ted, as a follow-up, I would love for you to touch upon any key trends or expectations as it relates to dealmaking and M&A to be aware of as we go through the balance of 2025. 

Ted Rosen: 

Look, anytime there's uncertainty in the economy, the playbook is generally the same. So first, you need to have greater due diligence. So, deals will take longer as due diligence will be much more complicated as buyers will seek to carefully assess the impacts of tariffs, supply chain, and other economic consequences of tariffs on sellers historical and projected EBITDA. Look, we sell these businesses based on adjusted EBITDA and past performance, so if there's going to be an impact of tariffs that's going to hit the bottom line, it's going to really make deals more difficult. So due diligence will become much more important. Two, we use earnouts all the time in transactions, meaning I think what buyers will do is they'll look to defer purchase price or tie purchase price payments to earnouts with revenue metrics. So, rather than an increase of the base purchase price, buyers may seek to hedge the sales price into an earnout based upon post-closing sales performance. This way, both parties will be sharing the risk. And then lastly, especially in private equity transactions where the private equity buyers seek to have the sellers roll over a portion of their equity into the holding parent company of the portfolio companies, I think buyers will seek to have more rollover equity to reduce their risk and to reduce their leverage, especially in a high interest market. 

Elana Margulies Snyderman: 

And Ted, more specifically, what industries or sectors will be most impacted by the tariffs? 

Ted Rosen: 

So, I think any industry that can pass along the increased cost of goods or care to replace those goods with U.S.-made products will be in a difficult position. I sold a railroad parts company in January, and even though it's impacted by tariffs, the ultimate customers need those products. It's transportation industry, they have to have them. So, the deal still went forward even though the buyer knew that the tariffs would be increased, and it's just a cost of doing business. As to industries, consumer products, food, wine most upsetting to me, pharmaceuticals, parts and equipment, electronics are obvious areas of concern. Just for example, I represent a very large apparel company that sources all its goods from Vietnam, Cambodia, and China. So, the client said his customers won't allow him to pass on the increased cost, so how will his business survive? It literally is an existential question. 

Elana Margulies Snyderman: 

Ted, to shift gears, there are many considerations companies need to think about when contemplating a transaction, and I would love to hear some best practices you would give to a company when contemplating both buy-side and sell-side transactions. 

Ted Rosen: 

Yeah, it's a great question. So, I think pre-sale best practice is to conduct trade due diligence. So, the tax regulatory and legal teams for both sides need to evaluate tariffs and the impacts on the targeted business, including the financial models used to value the business, since the impact of these new tariffs will not appear in historical financial statements. So, due diligence will need to cover all aspects of the supply chain, including the impact on the cost and availability of raw materials, components and other supplies, and the impact on demand for the target's business's products. The second-best practice is mitigation strategies, which will help make a company's earnings outlook look stronger, such as increasing inventory and content, seeing if there's supply chain restructuring available. And then lastly, on the sell side, and this isn't new, but it will become just as important, is I work a lot with EisnerAmper, in fact, on either obtaining or creating a quality of earnings report, or what I call a QoE Lite, so that our client understands what their adjusted EBITDA is and not just a baseline EBITDA. So, just a quick story to explain what I mean by that. So, a client of ours received a $70 million offer from a private equity buyer, and when I asked my client what the adjusted EBITDA was, he said he just really didn't know. So, I called Jon Zefi, a Senior Partner at EisnerAmper, and we worked with Jon and Phil Bergamo among others, to come up with a seller's proposed adjusted EBITDA calculation. We were then able to negotiate the purchase price up by 42%, a huge win for our respective clients. 

Elana Margulies Snyderman: 

Ted, given your role as an M&A attorney, can you touch upon some legal considerations when it comes to dealmaking, and due diligence we should anticipate as a result of the tariff situation? 

Ted Rosen: 

Yeah, this is a great question, and there are things that we definitely are seeing are changing in this space from a legal perspective. So, in a transaction, the first, I think, really important document that gets done is a letter of intent or LOI. And rarely do we address in an LOI tariffs. However, buyers will want to consider the impact of tariffs and how comprehensively they want to address them at an early stage of a transaction. So certain things that buyers may want to consider in a letter of intent could include: purchase price adjustments if EBITDA is reduced as a result of tariffs; specific indemnities from sellers; and/or what remedies a buyer may have if tariffs create a material adverse event, which is a defined legal term in the purchase agreement, which could include the right by buyer to terminate the transaction if seller's earnings are dramatically and substantially reduced as a result of tariffs. So only time will tell how the market reacts to this situation. The second area from a legal perspective that will be impacted by tariffs is the use of representation and warranty insurance. So, for those in the audience that don't know what this is, most transactions that are size of at least $20 to $30 million, we generally use representation and warranty insurance, which is an insurance product which covers breaches of the seller's representations and warranties discovered after closing. So, the RWI carriers are now responding by having carve outs from their policies related to the risks of tariffs. So, buyers will want to seek to narrow any proposed exclusions as much as possible and will need to demonstrate that they have performed fulsome due diligence on tariff-related risks.To the extent that any exclusions remain, buyers will need to consider whether to seek specific indemnities from the seller. Their ability to do so will also depend on the buyer's leverage and deal dynamics. And then the last change that we'll be seeing from a legal perspective is more fulsome representations and warranties relating to tariffs and supply chain. So, buyers may request enhanced protection through specific representations and warranties, like compliance with tariffs, sourcing ability, guarantee of sourcing, guarantee of clients. So, the representation and warranty insurance, and expanded representations are all tied together. 

Elana Margulies Snyderman: 

Ted, are there any overriding transaction recommendations and final thoughts you would like to share with us today? 

Ted Rosen: 

Yeah, look, I think we need to stay calm. The world isn't ending. Where there's chaos, there's also opportunities. I think sellers need to do their homework and run a robust process and properly package their companies, and they'll do well in this process. And buyers who can best diligence the impacts of tariffs will be better situated to make informed decisions on whether to proceed and how to value targets. Lastly, time will tell whether price earnings multiples go down, remain stable, or even increase for companies with little or no tariff exposure. So, it's a scary time and it's an exciting time, and we'll continue to be... I think the market may take a slight pause, but I still am getting deals and people calling me to sell their companies, so we shall see. 

Elana Margulies Snyderman: 

Ted, I wanted to thank you so much for sharing your perspective with our listeners. 

Ted Rosen: 

My pleasure. Thanks for having me. 

Elana Margulies Snyderman: 

And thank you for listening to the EisnerAmper podcast series. Visit EisnerAmper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast, when we get down to business. 

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