The Impact of Tariffs on Business Sales: What Buyers and Sellers Need to Know

Tariffs are front and center of the economic discussion these days

The Impact of Tariffs on Business Sales

With global trade policies and tariffs making headlines, many business owners and potential buyers are asking how these changes affect the value and salability of privately held companies. While factors like cash flow and industry trends are always top of mind, tariffs can introduce new risks, and sometimes opportunities, that directly impact your bottom line in a sale.

What Are Tariffs, and Why Do They Matter?

Tariffs are government-imposed taxes or duties on imported goods. Their main purpose is to protect domestic industries from foreign competition or to retaliate against trade imbalances. But for the business owner considering a sale, or the entrepreneur interested in acquiring a company, tariffs can significantly alter the landscape.

How Tariffs Affect Business Valuation

When performing a business valuation, brokers and buyers examine past and projected financial performance. Tariffs can influence a business’s cost structure, pricing power, and profit margins:

• Increased Costs: If a business relies on imported materials, tariffs can drive up input costs. This, in turn, reduces gross margins unless the business can pass these costs onto customers, which is not always feasible in competitive markets.

• Changing Supplier Relationships: Some businesses may need to diversify suppliers or shift to domestic alternatives, which often come at higher costs or require substantial operational adjustments.

• Demand Fluctuations: Tariffs may cause suppliers or customers overseas to retaliate, reducing demand for the business’s products or services in global markets.

All these factors can lead to lower SDE (Seller’s Discretionary Earnings) or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), which are the metrics most commonly used to value small and mid-sized businesses. Lower earnings generally mean a lower valuation, directly impacting the final sale price.

Confidentiality in the Face of Volatility

One of the primary concerns for sellers is maintaining confidentiality regarding the details of the transaction. In times of economic uncertainty or rapid regulatory change, such as the imposition or lifting of tariffs, rumors can spread quickly and create unnecessary panic among employees, suppliers, and customers. An experienced business broker can help sellers maintain confidentiality while ensuring all necessary due diligence regarding tariff exposure is handled with discretion.

Attracting and Qualifying Buyers

Buyers are increasingly sophisticated and will scrutinize how tariffs impact your business. They may ask:

• What percentage of your costs come from tariff-impacted imports?

• How have recent tariffs affected your margins?

• Have you successfully passed on increased costs to consumers?

Businesses that have already taken proactive measures, by diversifying suppliers, renegotiating contracts, or streamlining operations, become more attractive to potential buyers. Clear documentation and planning can also speed up due diligence and negotiation, reducing the risk of deals falling through.

Deal Structure, Financing, and Risk Mitigation

Given the uncertainty tariffs can introduce, buyers may negotiate risk-sharing mechanisms:

• Earnouts: Part of the purchase price may be contingent upon future performance, protecting buyers from overpaying if tariff impacts worsen.

• Seller Financing: Sellers may be asked to finance part of the purchase, signaling their confidence in the ongoing viability of the business post-transaction.

• Price Adjustments: Valuation models may be adjusted to reflect higher risk or incorporate scenarios related to future tariff changes.

Financing options may also become more complex when a business’s profitability is exposed to tariff volatility, as lenders may require more comprehensive risk assessments.

A massive cargo ship laden with colorful containers approaches the port, ready to deliver its goods.

Tax Implications

Tariffs themselves do not directly affect the tax treatment of a business sale, but they do change the underlying financial picture. Lower profitability may influence capital gains, recapture, and other tax elements involved in selling a business. Consulting with a tax professional who understands the nuances of international trade is strongly recommended.

Transition Planning in a Tariff-Affected Environment

After closing, new owners will want to ensure continuity and minimize disruptions due to supplier changes, renegotiations, or market repositioning. A well-designed transition plan, possibly including training and support from the seller, is even more critical when tariffs have recently shifted the business environment.

Bottom Line

Tariffs present both challenges and opportunities in the world of business sales. They can drive down valuations, complicate deals, and add new layers of due diligence. However, with the right preparation, focusing on supplier management, cost control, transparent documentation, and risk-sharing deal structures, buyers and sellers can still achieve successful outcomes.

If you own a business affected by tariffs and are considering a sale, or if you are an investor seeking to take advantage of new market realities, working with an experienced business broker is essential. At Infinity Business Brokers, we can help you navigate these complexities with confidence.

Ready to discuss the sale or purchase of your business? Contact us today at (239) 599-5001 to schedule a confidential consultation or use my direct scheduling link https://app.simplymeet.me/mfinley.