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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 busi­ness, whether you feel it directly or not.

Our basic equation for valuation is: value = benefits x risk factor. Anything affecting the bene­fits derived from a business or the risk in achiev­ing those benefits impacts value.

The United States exported 12.3 percent of its Gross Domestic Product (GDP) in the third quar­ter 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.

“If 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,” says Joe Brusuelas, chief economist at RSM.

Business valuators assess risk on three levels, macro-economic risk, industry risk and compa­ny-specific risk. Let’s take a look at each.

Macro-economic risk
Macro-economic risk includes international el­ements, national economic data, regional eco­nomic data and metropolitan economic data.

International risk includes what is happening in the global economy that might affect the per­formance 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, Water­loo gets the flu. If your business is reliant on John Deere, it may get pneumonia.

Industry risk
Industry risk in­cludes the per­formance of the specific industry in which you and your cus­tomers operate, and the struc­ture, trends and lifestyle of your industry.

It is import­ant to know what the out­look 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 con­solidated is the industry? Are there large players that could take advantage of short-term trade im­pacts 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?

Company-specific risk
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 mar­ket or acquire them at bargain prices.

Some businesses will be more diversified than others. Those with exposure to industries less af­fected by tariffs may be better able to withstand the impacts than others.

The quality of management may be the decid­ing survival factor. Those with strong and nimble operational and financial management capabili­ties 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 re­flect how the market would perceive risk for your business. Trade policies and tariffs may create uncertainty on multiple levels. Uncer­tainty creates risk.

Maurie Cashman is a member-owner of Agri-Management Farm Services LLC and manages its Aspen Grove Investments brand