The Tariff Factor: What Business Owners and Advisors Need to Know About Its Impact on Value
Tariffs can quietly reshape what your business is worth. They influence both the numbers that drive a valuation and the level of risk investors or buyers are willing to accept. Whether you’re preparing for a sale, an ESOP, litigation, or financial reporting, understanding how tariffs affect value helps you make sense of the conclusions your valuation professional provides.
- How Tariffs Affect Cash Flow — the “Earnings Power” Behind Value
Tariffs most directly hit the financial side of a company — its ability to generate future cash flows. For users of valuations, this means that even if revenues appear stable, profitability and value may fall.
- Higher Costs: Tariffs raise the price of imported materials, parts, or finished goods. Unless those costs can be fully passed on to customers, profit margins shrink.
- Reduced Competitiveness: If competitors source domestically or from countries not subject to tariffs, they may maintain lower prices, pressuring your market share.
- Revenue Pressure: Passing on tariff-related costs often leads to higher selling prices — and possibly lower demand.
- Increased Overhead: Managing new compliance, customs, and sourcing requirements adds to operating expenses and reduces free cash flow.
In short, higher costs and lower margins translate directly to lower earnings and, therefore, lower value.
- How Tariffs Affect Risk — and Why It Changes the Discount Rate
Valuators also consider risk perception — how uncertain your company’s future appears to investors or the market. Tariffs can increase this uncertainty in several ways:
- Economic and Political Volatility: Shifting trade policies make forecasting less reliable.
- Higher Discount Rates: Greater uncertainty means investors demand a higher return, which mathematically reduces value in discounted cash flow (DCF) models.
- Industry Exposure: Manufacturing, automotive, construction materials, and retail are often hit hardest. Companies in these sectors face both operational and valuation risk.
- Investor Sentiment: Trade tensions can reduce market confidence, lowering valuation multiples for comparable companies.
- How Valuation Professionals Account for Tariffs
Valuators don’t treat tariffs as an afterthought — they build them into every stage of the analysis. For users of valuation reports, here’s what that looks like:
- Scenario Analysis: Multiple forecasts are modeled to test the effect of different tariff levels — showing best, base, and worst-case outcomes.
- Adjusted Financial Forecasts: Tariff-driven cost increases and revenue impacts are explicitly reflected in the company’s projections.
- Risk Adjustments: Discount rates may be increased to reflect tariff-related uncertainty and industry exposure.
- Market Evidence: Comparable public company and transaction multiples are reviewed for signs that the market has already “priced in” tariff effects.
- Qualitative Review: Beyond numbers, a valuator assesses management’s ability to adapt, source alternatives, and sustain profitability under new trade conditions.
- What This Means for Business Owners and Advisors
If your company operates in an industry affected by tariffs — or relies on imported materials or export markets — you should expect your valuation professional to address this directly. A thoughtful valuation will:
- Explain how tariffs affect your specific cost structure and customer base.
- Demonstrate how the risks are quantified in the valuation model.
- Provide scenario-based insight into how value could change if tariff conditions shift.
Conclusion
Tariffs aren’t just a headline — they’re a measurable factor that can alter business value through their effect on costs, competitiveness, and risk. For users of valuations, recognizing how your appraiser has incorporated (or should incorporate) tariff considerations ensures that you can better interpret the numbers and use them confidently in decision-making.
