Tariffs and Business Valuation – What’s the Impact?

If there was one word that I would use to describe the start of 2025 it would be uncertainty. Not only are we in the midst of a provincial election in Ontario, but a Federal election is likely around the corner and there has obviously been a major administration change with our friends to the south – the United States (“U.S.”). It is this latter change that is creating the most uncertainty with announcements seeming to come on an almost daily basis especially with respect to the potential for tariffs to be put in place on Canadian goods being exported to the U.S. and vice versa. 

So what is the impact of these tariffs from a business valuation standpoint? The primary considerations and impact are as follows: 

• Valuation Date – as noted in previous articles relating to COVID-19 and Cryptocurrency, the valuation date is an important factor in the valuation of a business since the valuation is based on information known up to and including that date. Thus, if we were asked to value a business that exports a significant percentage of goods to the U.S. with a valuation date back in October 2024, we would have been pretty comfortable relying on the historical operating results in developing our business valuation model. However, move that valuation date up to February 2, 2025 and the uncertainty related to how the business is going to perform going forward with tariffs of 25% on its exports becomes amplified and creates another layer of difficulty in our modelling.
• Profitability – The most obvious factor is figuring out the impact to a business’ profitability. While there are unknowns in terms of what is going to be impacted, it is going to be necessary to develop an understanding of how the business’ sales are going to be impacted if they export significant amounts of product to the U.S., or if the business is going to be able to pass along price increases to their customers if their costs increase as a result of Canadian tariffs on U.S. goods. At the end of the day, profit and cash flow are key drivers for valuations and any negative cash flow impact is going to negatively impact the value of the business.
• Risk – All of the uncertainty also means higher risk and higher risk also negatively impacts the value of the business. Until more is known about whether or not the tariffs will actually come to fruition then the risk right now is bound to drive down valuations, all else being equal.
• Assessing Management – As we move through the next few months, examining how a business’ management team is able to adapt through the implementation of tariffs is another consideration that a valuator will examine. Are there new markets for their products or alternative sources of supply that management can find to minimize the impact of the tariffs on cash flows and the business’ risk profile. The quality of the management team is one of the key considerations that impacts value and there is no better time to assess management then when there is a crisis.