It’s been the best of times and worst of times for mergers and acquisitions. As volume and valuations rose in Q4 of 2024, it was expected that the New Year would bring a resurgent M&A market. The potential for cheaper borrowing costs and less regulation fueled a rally in January.

But the party may be over, at least for now. With the prospect of tariffs, government austerity measures and contracting GDP, the threat of volatility may be worse than volatility itself. Headed into the year, the market had priced in a 100-basis-point decline in interest rates this year, but Federal Reserve Chair Jerome Powell has been accused of being someone who comes late to parties.

Headed into 2024, deal flow and multiples had been well below their 2022 highs. One of the reasons valuations had stalled is that private equity has been on the sideline. With fewer financial buyers, private seller auctions have been somewhat limited to strategic buyers. While volume was strong for bigger companies, deals for SMBs (small and midsize businesses) shrank by 18% in 2024.^I

The uncertainties about tariffs and federal spending impact the valuation of the dollar, the balance of imports and exports, and the likelihood of another round of supply chain shocks. In many cases, SMBs do not feel confident paying 6-10X to roll up similar firms. And as companies are distracted by operational challenges posed by tariffs and other market shifts, they may be less focused on mergers and acquisitions.

As many economists revise down their GDP growth forecasts for 2025-2026, multiples could erode further.

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