How tariffs could impact your business valuation – and what you can do about it
How tariffs could impact your business valuation – and what you can do about it
As long as the threat of tariffs hangs over Canadian businesses, business values will continue to suffer. From increased costs to reduced consumer spending and ongoing uncertainty around how the future will unfold, business owners need to be prepared for lower transaction valuations and multiples moving forward.
In this article, we evaluate the potential impacts of tariffs on Canadian businesses and three steps that can help preserve as much value as possible.
The threat of tariffs being imposed by the United States causes significant uncertainty for businesses and workers in Canada. How would tariffs, threatened or actual, affect the value of your business — and what steps can you take in response?
Assessing the potential impacts
If tariffs are implemented, the Canadian economy will see a range of impacts.
Canadian exports to the U.S. will likely become less competitive as they would cost American buyers more than comparable American manufactured products. With possible countermeasures by the Canadian government, prices will likely increase on both sides of the border.
Industries like manufacturing (particularly automobile manufacturing), oil and gas, agriculture, steel, aluminum, and aerospace production and parts could be the most affected.
Another possible effect of a trade war could be a weaker Canadian dollar. While this would dull the impact of U.S. tariffs on Canadian goods, it would increase the cost of goods imported to Canada from the U.S., amplifying the impact on Canadian consumers.
Canadian businesses importing from the U.S. may become unprofitable and be forced to shut down, causing layoffs and job losses. The domino effect of tariffs (or the threat thereof) is that businesses may postpone new capital investment, and consumers may pause discretionary spending while waiting to see how events unfold.
What this means for business valuations
One of the first principles of business valuation is that the value of a business is a function of risk and reward. In uncertain economic times, investors demand a higher return to compensate for an elevated level of risk. Continuing uncertainty around tariffs creates uncertainty for business, which a potential buyer would consider in determining the purchase price it is willing to pay in an acquisition scenario.
When contemplating a higher risk / higher return environment, all else being equal, an investor would:
- pay less to purchase a business
- drive lower valuation multiples
- review the current value of their investments
- pause transactions until the uncertainty passes.
In general, the threat of the tariffs weighs down the value of Canadian businesses.
Tariff Risk Exposure Assessment
Actions you can take
Scenario planning
Political outcomes are difficult to predict, but you can address uncertainty by reflecting scenarios in financial projections and forecasts. You can model different assumptions to address tariffs in your business decision-making process. Your advisor can also leverage MNP’s Private Enterprise Insights tool to help you explore the impact of various scenarios.
Diversification
It’s also worth mentioning that diversification reduces your risk exposure. Now is a great time to explore new markets, customers, and suppliers not subject to tariffs. Diversifying will take time and resources, and success is not guaranteed. But you need to be proactive in periods of uncertainty. Some businesses may not have the luxury of time if tariffs cause a major and sudden disruption to their business model. Identifying alternative options ahead of tariff implementation is always a good investment.
Streamline operations
While much of the current situation is out of your hands, operational efficiency is something you have some control over — and an efficient business is a more valuable one. Bring your team together and take a critical look at your operations. Whether tariffs are implemented or not, improving efficiency will result in a stronger business position.
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