How the new Tariffs Might Affect Business Valuations

At the time of this writing, we are in the midst of a 90-day “pause” in the implementation of “the President Trump tariffs.” Washington observers are divided on the tariffs. Supporters believe President Trump is clearly in the driver’s seat as he wields the leverage accorded the world’s largest economy to correct decades of imbalanced trade relations. They’re content to tough-out a period of uncertainty they hope ends with more favorable trade agreements. Critics take more of the “sky is falling” approach, evoking the ghost of Smoot-Hawley, and forecasting a stock market collapse. Neither side has a crystal ball, so it’s impossible to declare with any certainty what the ultimate resolution will look like. All we can say for sure is that things will be different.

It is highly unlikely that President Trump will return to the zero-level for which free trade supporters have consistently argued for since the days of Calvin Coolidge. He’s said many times, “I like tariffs.” He also has ambitious plans for working-class tax relief, including the elimination of taxes on tips, overtime, and Social Security. Commerce Secretary Howard Lutnick has intimated that Mr. Trump aspires to eliminate income taxes for anyone making less than $150,000. DOGE cuts alone won’t make up that lost revenue. It’s safe to say that the President’s future plans include an across-the-board, base-level tariff.

So, if increased tariffs are here to stay, how will businesses be affected? Specifically, how might the valuation of a business be affected? Since NAFA is in the business of business valuation, we took a look at the areas of valuation where tariffs might have the greatest impact:

• Increased costs of goods — Yes, tariffs are inflationary, at least as far as imported goods go. Companies relying on global supply chains will see higher procurement costs. Absorbing these costs means decreasing profits. Passing on cost increases to consumers might result in lower sales, which again reduces profits.
• Supply chain threats — If a company’s current supply chain is too dependent on suppliers in high tariff nations, it will make sense to find other suppliers enjoying friendlier status. This can also lead to reshoring some manufacturing, which relieves some costs, such as transportation of goods to market, but raises others, such as labor. Certain sectors may be unable to source components from alternate regions, so they’ll be saddled with the tariffs and the growing threat of a trade war rupturing the supply chain.
• Development derailed — The folks in the C-Suite are supposed to provide the vision and chart the course. They must motivate their workers and win the confidence of investors. Uncertainty on the level we’re currently seeing makes strategic planning incredibly difficult. But companies that delay or cancel strategic initiatives, such as mergers and acquisitions, can miss opportunities, resulting in slowed growth or even retraction. Companies wishing to commit to M&As might first have to renegotiate terms in light of tariff concerns.
• Market forecasting — Business uncertainty and inflationary pressures can make it difficult to project revenue. If tariffs dampen the overall economy while inflating prices for your company’s goods, your valuation will suffer.

Turbulent times present risks as well as opportunities for rewards. Standing pat is rarely an option, so what often matters most is the quality of the information you’re using to make your business decisions. NAFA provides the detailed analyses business leaders need to avoid pitfalls and seize opportunities. Call us today.