What the turbulent trade environment means for M&As

Uncertainty surrounding tariffs and the economy is rattling buyers’ nerves and stalling deals, but it could also be creating opportunities for growth-minded entrepreneurs

15-minute read

Published March 21, 2025

When businesses talk mergers and acquisitions (M&A), there is always a discrepancy between what the seller hopes to get for the business and what the buyer is willing to offer. But the recent trade tensions between Canada and the U.S.—and the ensuing firehose of tariff announcements—have complicated dealmaking.

This is unfortunate because business acquisitions are one of the top ways to grow a business and become more competitive.

As businesses scramble to navigate the current market volatility, buyers now have much more to consider to insulate themselves from future risks. Sellers also have more work to do to weather-proof their operations.

As a result, we expect to see delays, more cautious dealmaking, a greater emphasis on contingency planning and a preference for domestic deals.

At the same time, we are hearing from owners of mature mid-sized firms who have a strong balance sheet. They tell us they are seeing opportunities for acquisitions in the current market.

We also see an opportunity for smaller, newer businesses that may not have the balance sheet strength of the previous group but could benefit from the rapid growth available through acquisitions. At a time when our economics team estimates that 24% of businesses are looking for buyers, growth-focused companies can use debt strategically to take advantage of an unprecedented situation in the market.

In this context, what can you do as a buyer or seller to take advantage of these opportunities while protecting your business?

Amid all the uncertainty, it’s difficult for any business to predict how its ability to sell to its customary market may evolve over the next four years.

How might trade unpredictability affect the M&A market?

Unpredictability in trade and economic policy is making it difficult for any business to predict how its ability to sell to its usual market may evolve over the next four years. This complicates the analysis for potential buyers.

Tariffs affect businesses in two key ways that weigh on the M&A market:

Direct exposure
If you build a product and ship it across the border, it may be subject to a tariff. You may lose customers because of the higher price. The same applies for companies that import goods from abroad as input.
Indirect exposure
This refers to the general economic impact of current trade frictions. This will affect all Canadian companies, whether or not they export.

We’ve seen that trade uncertainty is already stalling or completely derailing acquisitions because cautious buyers are pulling back, particularly when most of a business’s sales are U.S.-bound.

That said, there are two potentially positive trends for Canadian companies right now.

One is the Bank of Canada’s recent decision to lower interest rates by 25 basis points (and the expectation that it may do so again in months to come). Reductions can help the M&A market by reducing the cost of Canadian capital.

The other is fluctuation in the value of the Canadian dollar. A weak dollar helps companies that pay their expenses—like rent, payroll and supplies—in Canadian dollars and collect revenue in U.S. dollars.

Expect considerably more discourse on how to structure a deal.

What if a significant portion of your business’s sales are to the U.S.?

If you’re looking to sell and most of your customers are American, you’ll face some headwinds, but there are still a few things you can do:

Analyze the potential impact of the trade uncertainty on your income statement and balance sheet and assess your business’s ability to service its debts. This will prepare you to respond to a buyer’s questions and concerns.
Demonstrate stability in the face of tariffs by showing long-term contracts with customers, a diverse customer base and contingency plans for supply chain disruptions.
Assess the potential impact of trade agreement renegotiation, such as the USMCA, on your business.
Start diversifying your markets from a customer and geography perspective. Until recently, the U.S. was a great trading partner and a large market. But there’s been a shake-up. Now is the time to start adapting.
Explore selling to other provinces. Eliminating interprovincial trade barriers represents a huge opportunity that could add up to $200 billion to the Canadian economy.
Keep building your company for the long term, regardless of shifting economic and geopolitical issues. This will help you weather the storm and position you well to negotiate a deal eventually.

If you must sell now, recognize that you may not get the price you had in mind. In addition, expect considerably more discourse on how to structure a deal. It may take patience.

You can almost certainly expect to be asked for a vendor note or earn-out as buyers look to protect themselves from unforeseeable geo-economic impacts.

2 financial instruments buyers can propose to lower risk

A vendor note (also known as vendor financing) is a loan that the seller gives the buyer to help finance the transaction.
An earn-out is an arrangement in which a part of the purchase price is payable only after the closing and is earned if and when certain conditions are met. The conditions are usually related to the company’s financial performance, such as attaining a certain profit or sales level. It provides a way for the seller to get their desired valuation, while the buyer mitigates the risk that the company may not perform as expected after the transaction.

As a buyer, how can you protect yourself from tariff uncertainty?

If you’re looking to make an acquisition in this market, you can aim for a larger vendor note or implement an earn-out connected to the company’s future performance. In addition:

Rigorously research all the potential impacts of the tariffs on the business.
Assess the revenue stability of the business under different trade scenarios and conduct stress testing to see how new tariffs or supply chain disruptions might affect financial performance.
Put together forward-looking forecasts and worst-case scenarios.

In addition, recognize that while U.S. importers will pay the retaliatory tariffs imposed by Canada—meaning that the Canadian company’s costs may not go up—sales could still decrease if U.S. buyers drop off.

Some buyers may benefit from mezzanine financing, a type of “patient” business loan that offers repayment terms adapted to a business’s cash flow. A mezzanine loan ranks below debts to senior lenders (such as charter banks), with payments deferred until the senior debt has been paid down. In some cases, mezzanine financing may include equity-like features, offering additional breathing room to help businesses weather a storm.

The Canada–U.S. trade uncertainty is an unprecedented shift in the countries’ relations and trade, and no business has a crystal ball. Deals will still go ahead, but it will pay tomorrow to be more cautious today.

Next step

Looking for more advice? Reach out to BDC’s team of growth and transition experts.