Trade war, tariffs affect business valuation
Reprinted from the January 22nd, 2019 Corridor Business Journal.
By Maurie Cashman / Guest Column
Tariffs and trade have an impact on your busiÂness, whether you feel it directly or not.
Our basic equation for valuation is: value = benefits x risk factor. Anything affecting the beneÂfits derived from a business or the risk in achievÂing those benefits impacts value.
The United States exported 12.3 percent of its Gross Domestic Product (GDP) in the third quarÂter of 2018, down slightly from the high of 13.7 percent. (See chart at right.) The IMF has reported that a trade war could cost the global economy by lowering worldwide growth by as much as 0.5 percent by 2020, amounting to around $430 billion in lost GDP, a significant risk.
â€œIf the tariff policy is fully implemented, the costs will likely exceed $1.3 trillion with the risk of a much greater hit to the U.S. economy than many are currently anticipating and a premature end to the business cycle,â€ says Joe Brusuelas, chief economist at RSM.
Business valuators assess risk on three levels, macro-economic risk, industry risk and compaÂny-specific risk. Letâ€™s take a look at each.
Macro-economic risk includes international elÂements, national economic data, regional ecoÂnomic data and metropolitan economic data.
International risk includes what is happening in the global economy that might affect the perÂformance of economies relative to one another, and how this affects the outlook for business that participate in those economies.
The performance of various geographic regions differs greatly. Manufacturers in the Midwest may suffer while tech companies in California are booming. Tariffs tend to magnify these effects.
Many metro areas have built up dependencies on an industry. Tariffs may affect that industry disproportionately. If John Deere sneezes, WaterÂloo gets the flu. If your business is reliant on John Deere, it may get pneumonia.
Industry risk inÂcludes the perÂformance of the specific industry in which you and your cusÂtomers operate, and the strucÂture, trends and lifestyle of your industry.
It is importÂant to know what the outÂlook is for this industry and how dependent it is on imports or exports. Are some players more exposed than others to trade and tariffs? How fractured or conÂsolidated is the industry? Are there large players that could take advantage of short-term trade imÂpacts to acquire smaller companies or force them out, or can the impact of a tariff create a long-term trade advantage or disadvantage for your industry?
Companies that are well-structured financially will have a better chance of surviving and even prospering from trade policy disruptions. Those with a war chest may decide to attack weaker competitors and even drive them from the marÂket or acquire them at bargain prices.
Some businesses will be more diversified than others. Those with exposure to industries less afÂfected by tariffs may be better able to withstand the impacts than others.
The quality of management may be the decidÂing survival factor. Those with strong and nimble operational and financial management capabiliÂties will innovate to take advantage of whatever situation they encounter. Those without may fall victim to trade policies much more quickly.
The resulting overall risk factor should reÂflect how the market would perceive risk for your business. Trade policies and tariffs may create uncertainty on multiple levels. UncerÂtainty creates risk.
Maurie Cashman is a member-owner of Agri-Management Farm Services LLC and manages its Aspen Grove Investments brand