June 9, 2025 Challenges and Opportunities in Today’s M&A Environment

Manufacturers should know how to navigate today’s mergers and acquisitions market, including how to handle the impact of inflation.

By Frank Pellegrino

In today’s mergers and acquisitions market, sellers face a paradox: While private equity capital and strategic buyers’ need for innovation keep demand high, inflation, labor shortages, higher interest rates, evolving trade policies, and ongoing supply chain issues have complicated valuations and increased execution risk. Sellers must carefully time and structure deals to maximize value and ensure success after the deal closes.

A disciplined, well-prepared deal process remains essential as buyers and lenders are more demanding than ever. Lenders now scrutinize target performance and downside scenarios more aggressively, which in turn means that buyers lean harder on sellers for robust disclosures and diligence. Accordingly, the optimal timing strategy is not simply to close at the earliest calendar moment but to run a disciplined preparatory process—often beginning six to nine months before launching the sale—so that the window between first-round indications of interest and signing can be expedited without sacrificing execution certainty.

The inflationary environment also invites consideration of purchase-price adjustments tied to working capital or inventory fluctuations. Historically, M&A participants relied on target working capital pegged to an average of trailing month-end balances. In a period of rapid cost inflation, that approach can penalize the seller by forcing a “true-up” at closing when nominal working capital exceeds the historic average. Sellers should negotiate collar mechanisms that protect against adverse adjustments outside a defined range. In sectors where raw material costs are particularly volatile—chemicals, packaging, and certain food ingredients—a locked box structure may provide superior certainty: The economic risk transfers to the buyer as of a preagreed balance sheet date, with interest-like “leakage” adjustments compensating the seller for cash flows generated between that date and completion.

Seller financing is also returning as a potential financing option in the current M&A environment. A well-structured seller note—ideally secured, carrying a market coupon, and accreted to face value if paid early—can sustain headline price. Nevertheless, a seller must rigorously conduct diligence related to the buyer’s capital stack and projected free cash flow to mitigate default risk. Where multiple bidders exist, the seller can press for a true senior secured note or, at minimum, a second-lien position with negotiated cure rights and information covenants. 

Buyers, particularly financial sponsors, frequently require sellers to roll into the acquiring entity. Any rollover equity position should be structured with rights to tag along, board decisions, and preemptive participation in future financings while carefully delineating drag-along thresholds to avoid being compelled into an unfavorable liquidity event.

Earn-outs have regained prominence, allowing the parties to bridge valuation gaps attributable to short-term dislocations. In crafting an earn-out, a seller should pursue objective, revenue-based, or gross profit-based metrics that are less vulnerable to post-closing accounting policy changes, seek the shortest possible measurement period consistent with business cycles, and insist on operational-control covenants that prevent the buyer from diverting resources or customers in a manner that depresses attainment. Escrowed holdbacks tied to indemnity obligations remain customary, but sellers can often mitigate exposure by purchasing representation and warranty insurance; the premium cost has edged higher in recent quarters, yet the competitive advantage of offering a “clean exit” still attracts strategic and sponsor bidders. Where supply chain or regulatory risks are heightened—a particular concern in manufacturing—buyers often demand special escrows or specific indemnities. Sellers can partially neutralize this drag by agreeing to separate capped indemnities with time-limited survival periods, thereby quantifying tail risk without conceding open-ended liabilities. 

Another structuring lever lies in managing closing conditions and the “outside date” in the definitive agreement. Antitrust and foreign-investment reviews, although sector-specific, are increasingly unpredictable in the United States. Sellers should resist financing-out conditions, arguing that committed debt and equity backstops, together with reverse break fees calibrated to match the seller’s walk-away damages, provide adequate protection for the buyer while safeguarding the seller’s certainty of value.

Tax planning remains integral to structuring. With the corporate tax-rate outlook uncertain and legislation targeting carried interest and capital gains treatment resurfacing periodically, sellers should evaluate whether an asset sale or stock sale yields superior net proceeds.

Current threats of tariffs and the potential for renewed trade barriers add another layer of complexity. Tariffs on imported goods and materials can increase costs, disrupt supply chains, and create uncertainty around future profitability—factors that buyers will scrutinize closely in diligence and valuation. Sellers in affected sectors should be prepared to address tariff exposure, demonstrate mitigation strategies, and consider how shifting trade policy could impact both timing and deal structure.

In summary, sellers should move deliberately to market while structuring deals with protections that manage risk and preserve upside. Success depends on preparation, realistic valuations, and creative structuring to balance liquidity, tax, and stability—even amid higher rates, persistent inflation, and evolving trade policy.

About the Author:
Frank Pellegrino, a member at law firm Bass, Berry & Sims PLC, advises public and private companies in the construction materials, industrials, manufacturing, health care and technology industries on a broad range of transactional and securities matters.

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