While many business owners seeking acquisition or exit opportunities entered 2025 with optimism for increased deal activity, tariff announcements from the government of the United States and reciprocal tariffs announced by the Canadian federal government have led to a general slowdown in M&A activity. In the face of continued trade and economic uncertainties, the pace of, and approach to, deal activity is actively reshaping M&A deal structures.

This article provides an overview of the strategic considerations that we have been flagging for our clients pursuing transactions – whether buy-side or sell-side – from the initial planning stage to the negotiation of definitive transaction documents. It provides an overview of certain considerations and positions that vendors, on the one hand, and purchasers, on the other hand, should consider taking or can expect the other party to take as parties seek to understand and manage tariff-related risks and supply chain disruptions in the context of M&A transactions. For the purpose of this article, we will refer to the shareholders selling a Canadian business as the Vendors and the potential acquiror of that business as the Purchaser.

1. Initial Transaction Planning

  • Vendor Perspective – In preparing for the sale of their business, the Vendors should complete an initial tariff risk assessment exercise.  This should consider, among other things, the percentage of the business’s sales exported to the U.S. and its input costs from U.S. goods and services. The Vendors should also consider how the business’s risk exposure could be framed in a prospectus or confidential information memorandum being provided to the Purchaser. The Vendors should be prepared to discuss alternative customers or suppliers that could fill the void if new tariffs or supply chain disruptions restrict the company’s ability to do business with existing customers and suppliers.
  • Purchaser Perspective – With the limited information initially available to it, the Purchaser should seek to understand the tariff risks and logistical vulnerabilities of the target business and how that may compare with other potential acquisition targets / competitors of the business. Businesses that are dependent on the physical movement of manufacturing inputs and finished goods are likely more vulnerable to tariff risks and disruptions in transportation infrastructure, whereas service-based industries are likely to be more resilient.

2. Term Sheet / Letter of Intent (LOI)

  • Vendor Perspective – While negotiating the purchase price in the initial stages of a transaction, the Vendors should build a strong case that the earnings (or EBITDA) of the business will remain unchanged despite what may or may not happen on tariff issues. Some Vendors may prefer to include in the LOI high-level statements as to the parties’ intentions and expectations on tariffs and supply chain risks, while others recognize that these risks are a live issue for both sides and prefer to wait to negotiate any specific language until the Purchaser is farther into the diligence process and has a better understanding of the specific business relationships and risks of the target business. Nonetheless, the Vendors should anticipate that the Purchaser may want to approach pricing discussions creatively, including by proposing: (1) an earnout as part the purchase price so that the Purchaser has some protection in the event that earnings decrease or do not increase as forecasted following the closing of the acquisition; and (2) custom escrowed or holdback amounts to address higher production costs arising from U.S. tariffs, Canadian retaliatory measures and supply chain disruptions, or the business changes that may be required following the acquisition to address announced or future trade policy changes.
  • Purchaser Perspective – The Purchaser should consider how to make an attractive offer to the Vendors while still protecting itself from downside pressure to the earnings or EBITDA of the business. In addition to lowered prices, earnouts and specific escrows or holdbacks, the Purchaser can also manage the purchase price by introducing other recovery mechanisms in the deal documents (such as custom tariff-related representations and indemnities). While the Purchaser may signal its desire to include specific indemnities in the LOI, these will rarely be fully negotiated at this stage given all the specific details that the parties need finalize to properly document such a risk allocation approach. It would not be customary for the Purchaser to detail the specific tariff representations and warranties it expects to receive at this stage of the process.

3. Due Diligence

  • Vendor Perspective – While preparing responses to the Purchaser’s diligence requests, the Vendors should continue to proactively assess areas of risk for the business and plan to respond to the Purchaser’s likely concerns. For example, the Vendors and their advisors should know which commercial contracts of the business allow the target to pass tariff costs onto the applicable counterparties and should have growth plans prepared to enhance the non-U.S. portion of its business. The Vendors should review their operations for regulatory trade, updating the company’s import and export compliance procedures, verifying tax compliance, reconfirming the accuracy of all customs filings and if applicable, eligibility for preferential tariff treatment under the Canada-United States-Mexico Agreement and other free trade agreements. The Vendors should also ensure that the company’s recordkeeping practices on all tax and trade-related matters are in full compliance with applicable laws.
  • Purchaser Perspective – In addition to all the customary areas of target diligence, the Purchaser should complete specific diligence on tariff risks and supply chain vulnerabilities. This will depend on the nature of the target business but will typically include focusing on the target’s resilience to tariffs, its level of dependence on single trade partners, any lack of redundancy within its supply chains, its consumer base and ability to absorb or pass through increased costs to customers. The Purchaser should favour a target business with a demonstrated history of customs compliance, operational flexibility, robust contingency plans with alternative suppliers, and diversified markets or flexible manufacturing capacities. In a strategic acquisition, the Purchaser should also consider how its existing operations may be leveraged as part of the post-closing integration of the target business to reduce tariff risks for that target business (e.g., by shifting the target business’s sales pipeline or supply channels to non-U.S. customers or providers of the Purchaser).

4. Purchase Agreement

(a) Reps & Warranties

  • Vendor Perspective – The Vendors should expect that enhanced Purchaser tariff-related diligence will permeate through the representations and warranties in the definitive deal documents and that they may be required to make fulsome disclosures with respect to customer and supply chain matters that would not typically be detailed in deal documents beyond ‘top-20’ lists. The Vendors should complete their own robust internal diligence to ensure they can accurately make those representations, but should resist giving representations that speculate as to future changes in laws or cover foreign laws for which the Vendors have not received specific advice.
  • Purchaser Perspective – The Purchaser should work closely with their transaction advisors to consider how tariff risks can be addressed through customary ‘market’ representations and whether any novel representations are required to address other specific risks identified during due diligence. The Purchaser should scrutinize representations concerning material customers and suppliers, financial statements and undisclosed liabilities and should consider whether the definition of “Material Contracts” should require the Vendors to identify contracts of the target business that require the business to absorb tariff costs without any right to terminate or renegotiate during the short term.

(b) Covenants

  • Vendor Perspective – In transactions with a significant interim period, the Vendors should seek to balance their customary contractual obligation to manage the target business in the ordinary course during the interim period with the right to make business changes in response to rapidly evolving tariff laws without the Purchaser’s explicit consent. For example, the Vendors may want to provide for the right to amend material contracts outside the ordinary course to address tariff-related risks that may arise in a manner similar to how Vendors negotiated for the right to make similar changes to respond to new COVID-19 laws during the COVID-19 pandemic. The Vendors should also consider deal constructs in which they are permitted to make changes to address those risks and could propose carve-outs to the requirement to act in the ordinary course where the actions taken by the target business are commercially reasonable or in the event that the Purchaser does not respond promptly to the Vendors’ request for consent.
  • Purchaser Perspective – On the other hand, the Purchaser should want the right, during the interim period,  to approve any actions outside of the ordinary course that may change the business it has completed diligence on and thereafter agreed to purchase. On that basis, the Purchaser should seek to refine customary interim period operating covenants to provide for specific restrictions on the Vendors’ ability to change the business’s relationship with key customers and suppliers or make other critical changes in respect of tariff laws without consent.

(c) Closing Conditions

  • Vendor Perspective – The Vendors will typically want transaction certainty to the extent possible and should therefore negotiate the definitive transaction agreements to limit the inclusion of specific conditions precedent related to tariff matters and to minimize the risk that they will not be able to ‘bring down’ their representations and warranties as of the closing. On the former, the Vendors should focus the discussions on the market condition precedent for material adverse events which ties the condition to changes that actually impact the business, rather than simply the announcement of new tariff changes (the effects of which may be unknown for some time). If the parties agree to address tariffs through the provisions relating to a material adverse event, the Vendors should negotiate narrow specific language sufficient to provide the Purchaser with comfort without creating a broad ambit for the Purchaser to walk away from the transaction. On the latter, the Vendors should request materiality qualifiers in their bring-down requirements so that if there are changes in tariff laws, minor breaches of the representations and warranties will not give the Purchaser the right to avoid closing the transaction.
  • Purchaser Perspective – On the other hand, the Purchaser will want the flexibility to reassess the transaction in the event that specific changes are announced during the interim period. The Purchaser should consider providing for a specific closing condition providing that if there are changes in applicable tariff laws during the interim period that could reasonably be expected to materially increase costs or impact financial performance of the business, then Purchaser should not be obligated to close. The Purchaser should, if possible, seek to define what a material increase in costs or financial change is from its perspective to avoid future disputes as the parties’ intentions with respect to materiality qualifiers.

(d) Indemnities

  • Vendor Perspective – The Vendors should argue vehemently that the transaction does not warrant novel specific indemnities and instead that the Purchaser should satisfy itself through diligence and by relying on the negotiated representation and warranty package.
  • Purchaser Perspective – The Purchaser should protect the critical expectations that underlie its offer to purchase the business. To the extent that the Purchaser’s willingness to enter into the definitive agreements is based on, for example, the relationship of the business with a certain supplier continuing on the same terms post-closing or import duties and taxes remaining a specific level for a certain period of time, the Purchaser should convey those risk allocation items to the Vendors and if the parties are unable to otherwise mitigate those risks (including through representations and warranties), the Purchaser may seek to allocate those tariff-related risks through specific indemnities. The Purchaser should ensure that any proposals in this regard also consider the Vendors’ likely expectations on limitations on those indemnities (including with respect to time frame, recovery/indemnity caps, insurance requirements and protections from de minimis claims).

5. Other Closing Considerations for the Purchaser

(a) Representation and Warranty Insurance (RWI) Policies

To the extent the obtainment of a buy or sell side RWI policy is contemplated, the Purchaser or Vendor policyholder should consider whether tariff risks could be managed through the RWI policy. The policyholder should expect to be asked questions relating to tariffs during the underwriting call and should be prepared to illustrate to the insurer that even if tariffs may impact the business, the deal parties do not view it as a material risk. If diligence reveals that tariffs may cause a breach of a specific representation, insurers may include a deemed disclosure tied to that representation as opposed to excluding it altogether. However, in instances where there is more uncertainty about the impact of tariff risks, insurers are likely to impose exclusions for losses arising from tariffs. While an insurer’s approach to tariff risks may vary on a case-by-case basis, drawing on lessons from the overly broad exclusions imposed by insurers in response to the COVID-19 pandemic, the policyholder should resist, to the extent possible, any blanket carve-outs tied to macroeconomic developments, which insurers may seek to include in the RWI policy. Instead, the policyholder should aim to negotiate more narrow exclusions limited to the direct (as opposed to indirect) consequences resulting from tariff changes, such as an increase in supplier pricing. The likelihood of tariff exclusions will inevitably depend on the type of transaction, with heightened scrutiny expected in deals involving importers or exporters of goods.

(b) Transition Services

The Purchaser should also consider whether it would be beneficial for any of the Vendors to provide employment or consulting services in favour of the business following the closing as part of its tariff risk management strategy. For example, the Purchaser may want to engage the Vendors to continue their discussions with alternative suppliers as part of the business’s tariff risk contingency plans or to build new customer markets in non-US jurisdictions in order to be paid under a negotiated earnout.

(c) Related-Party Lease Arrangements

If the Purchaser will be assuming or inheriting real property lease obligations with the Vendor’s affiliates or related parties, the Purchaser should consider whether those arrangements to should be amended to provide for early termination rights in the event that the Purchaser is forced, as a result of tariff law changes, to relocate manufacturing capacity post-closing.

Conclusion

In the face of continued trade and economic uncertainties, vendors and purchasers will have differing priorities and strategic considerations when approaching M&A transactions and the allocation of responsibility for supply chain disruptions and tariff-related risks. There is no universal solution to addressing these risks and the approach and allocation of risks will be industry dependent. We expect that the M&A landscape will continue to evolve in response to changes in tariff laws and vendors and purchasers alike should be aware of the tariff-related risks and the impact on M&A deal structuring.

Our team is well-equipped to support clients in navigating the complexities of M&A deal structuring with solutions tailored to each transaction’s unique needs. For more information on navigating tariff-related uncertainties in your M&A transactions, please reach out to one of the authors or another member of Miller Thomson’s Mergers & Acquisitions Group