Industrial M&A dealmakers should focus on AI diligence, tariff exposure and financing flexibility to protect value and execution certainty.
By David W. Harper Jr. and Brian L. Sims
Credit: Photo by Sergey Sergeev via Pexels.
Industrial and manufacturing dealmakers should prioritize three issues in 2026: (1) artificial intelligence and automation diligence, (2) tariff and customs exposure, and (3) financing flexibility. Buyers and sellers that quantify these risks early, test contract rights and build sufficient covenant flexibility will be better positioned to protect value and execution certainty.
- Industrial and manufacturing M&A activity momentum continues, but dealmakers should scrutinize value durability, margin pressure and execution certainty.
- AI and automation are now core diligence issues, including current use cases, intellectual property ownership, data security and vendor dependencies.
- Tariff, tax and customs exposure should be quantified early, and particular attention should be given to pricing flexibility, pass-through rights and termination provisions.
- Private credit has broadened financing options, but borrowers should assess all-in cost, covenant flexibility, liquidity protections and downside resilience.
Many industrial deal trends from the second half of 2025 continued into the first half of this year. U.S. industrial manufacturing deal volume remained relatively flat, if not slightly down, in 2025, but KPMG reported that deal value increased approximately 90% over the prior year. In the first half of 2026, we saw growth in both deal flow and deal value, although that growth was largely due to an increasing number of transactions valued at $1 billion or more.
Key drivers included continued investment in AI infrastructure, grid modernization, increased defense spending, onshoring of U.S. manufacturing operations and access to a broader range of credit products. Headwinds include tariff uncertainty, geopolitical friction, potentially increasing interest rates and rising energy costs, especially for AI-driven infrastructure. Strategic acquirers have accounted for the majority of deal value since mid-2025, reinforcing the market’s emphasis on larger, thesis-driven transactions.
Given these trends, dealmakers in the industrial and manufacturing sectors would be wise to address the following when structuring and negotiating transactions.
While not unique to the industrial and manufacturing sectors, AI and automation are no longer “new” areas of focus for a potential acquisition but are now primary, and frequently top-priority, staples of the diligence process. Buyers and investors are increasingly focused on whether and how a target uses AI in its current operations, as well as how AI could be further implemented and expanded. Beyond line operations, AI is increasingly used to identify productivity improvements, reduce waste and labor costs, and schedule maintenance.
Sellers, meanwhile, should be prepared to discuss with buyers and investors their business’s use of AI and its associated risks, such as potential data leakage; ownership and infringement issues associated with intellectual property that was developed using or otherwise depends on AI; and verification measures implemented for AI outputs to avoid AI hallucinations, false positives and similar errors. These technology considerations are increasingly central to successful digital integration in manufacturing M&A.
Over the past 18 months, tariffs have become a significant and durable feature of transaction risk analysis, particularly in the industrial and manufacturing sectors. The good news for U.S. industrial and manufacturing companies is that this has resulted in a shift toward onshoring and reshoring of U.S. operations. However, this shift has also increased the scrutiny of supplier and customer contract terms, especially tariff-based risks, as these sectors continue to require imported raw materials and components. These concerns form part of the broader geopolitical volatility affecting U.S. M&A.
Buyers and sellers should both be focused on a review of supplier and, to the extent applicable, customer contracts and each party’s ability to pass through the costs of tariffs, taxes and customs expenses. For example, if an agreement includes fixed pricing that already accounts for tariffs, taxes and customs expenses, any increase in those costs generally cannot be passed through to the counterparty. However, without fixed pricing that accounts for tariffs and taxes, prices could rise sharply as a result of tariffs, eroding a company’s EBITDA.
In these instances, the company may look at the termination provisions of the agreement to confirm whether (1) the agreement can be terminated for convenience on a relatively short notice period and (2) a termination for convenience carries any termination fees or shortfall payments.
Industrial and manufacturing companies have more options for financing working capital and growth M&A, but credit structures, pricing and covenants continue to evolve rapidly. Institutional financing has declined as private credit has expanded, offering companies greater flexibility and operational support. That flexibility, however, can carry a higher all-in cost, including deferred, paid-in-kind interest, as well as greater default, acceleration or enforcement risk if the company underperforms.
Companies should therefore consider whether:
- A hybrid credit facility combining a term loan with an asset-based revolving loan would provide greater access to credit, particularly for equipment-intensive manufacturers or businesses with significant asset bases.
- EBITDA add-backs could mitigate incremental tariff costs that are expected to be alleviated through near-term pricing adjustments or one-time supply chain restructuring costs.
- Maintenance financial covenants with seasonal or cyclical adjustments are more appropriate than pure incurrence financial covenants.
- Operating and negative covenants provide sufficient flexibility (e.g. via grower baskets and covenant resets) to withstand liquidity cycles, accommodate growth and remain workable over a longer investment horizon.
“Addressing AI risk, tariff exposure and financing flexibility at the outset can help parties better assess valuation, allocate risk and preserve execution certainty.”
— Bass, Berry & Sims analysis
Buyers should focus early on AI use and ownership, data security, tariff and customs exposure, supplier and customer contract rights, and the target’s existing financing structure. These issues can materially affect valuation, risk allocation and closing certainty.
Businesses should quantify tariff exposure, model its potential effect on EBITDA, and review whether supplier and customer contracts permit cost pass-throughs or termination. The analysis should also account for imported raw materials and components that may remain necessary even after reshoring initiatives.
Private credit can provide greater structural and covenant flexibility than traditional financing, as well as strategic and operational support. Companies should nevertheless evaluate the full cost of that flexibility and support, including paid-in-kind interest, liquidity constraints and the consequences of underperformance.
Taken together, these trends underscore that dealmakers in the industrial and manufacturing sectors should prioritize early, focused diligence on AI-related risk and intellectual property ownership, closely review supplier and customer contracts for tariff pass-through and termination rights, and evaluate the full range of available credit structures and terms before transacting. Addressing these issues at the outset can help parties better assess valuation, allocate risk and preserve execution certainty in a market that continues to reward preparation and flexibility.
About the Authors:
David W. Harper Jr. is a member at Bass, Berry & Sims. He advises clients on middle-market debt financing transactions with a focus on guiding private equity funds in leveraging their investments and advising their credit arms in making senior and subordinate debt investments.
Brian L. Sims is a member at Bass, Berry & Sims. He advises regional and national companies and investors in strategic and complex business transactions, including mergers and acquisitions, minority investments and operational matters, with particular proficiency in advising private equity clients, independent sponsors, search funds, early-stage growth companies, management teams, family-owned businesses and physician practices.
