The Impact of Tariffs on Small Business Valuation

A Comprehensive Framework for Risk Assessment and Methodical Adjustments

The escalation of global trade tensions and tariff implementations in 2025 has altered the business valuation landscape and created additional challenges for valuation professionals and stakeholders. Using a multi-factor risk assessment model combined with adjusted valuation methodologies, the author shows how tariff exposure significantly impacts enterprise values across industries.

Introduction

The global trade environment has undergone dramatic transformation since 2025. The implementation of sweeping tariff policies that has altered cost structures, competitive dynamics, and risk profiles across industries. The weighted average U.S. tariff rate has surged from 2.2% to over 17% under aggressive policy scenarios, representing the highest levels since the early 20th century (Richmond Federal Reserve, 2025). This rapid shift—which is the subject of a legal challenge—has created a significant challenge for business valuation professionals, who must (especially if the tariffs imposed are legally upheld) now incorporate complex trade-related uncertainties into their analytical frameworks.

Traditional valuation methodologies, developed during periods of relatively stable international trade, require substantial modifications to address the multifaceted impacts of tariff policies. These impacts extend beyond simple cost increases to encompass supply chain disruptions, competitive repositioning, currency volatility, and broader macroeconomic effects that can fundamentally alter a company’s value proposition and risk profile.

Recent empirical research demonstrates the magnitude of these effects. The Penn Wharton Budget Model projects that current tariff policies will reduce long-run GDP by approximately 6% and wages by 5%, with middle-income households facing lifetime losses of $22,000 (Penn Wharton, 2025). Similarly, the Yale Budget Lab estimates that price levels will rise by 2.3% from 2025 tariffs alone, equivalent to $3,800 in annual consumer losses per household (Yale Budget Lab, 2025).

This study intends to address a critical gap in the academic and professional literature by proposing a comprehensive framework for incorporating tariff-related risks into business valuations. The research makes several key contributions:

1. Theoretical Framework Development: The model developed uses a multi-factor risk assessment that is specifically designed for tariff exposure evaluation
2. Methodological Innovation: The proposed model includes specific adjustments to traditional valuation approaches (DCF, market multiples, asset-based) to account for trade policy impacts
3. Empirical Validation: The model (readers can inquire with author) is based on an empirical study wherein real-world case studies and market data are used to validate the proposed adjustments
4. Practical Application: The model provided is intended to provide actionable guidance for valuation professionals navigating this complex environment

Literature Review

Theoretical Foundations

The theoretical foundation for incorporating geopolitical and trade policy risks into business valuation draws from several academic disciplines, including international economics, corporate finance, and strategic management. Damodaran (2021) established the framework for incorporating country risk into valuation models, while recent work by Li et al. (2025) has extended this to supply chain disruption analysis.

The traditional CAPM model requires modification when systematic risks include trade policy uncertainty. Recent research by the IMF (2025) demonstrates that supply chain diversification can enhance resilience and improve expected welfare by reducing transition losses associated with trade network disruptions by 20–35%. This finding supports the inclusion of supply chain flexibility as a key valuation factor.

Empirical Evidence on Tariff Impacts

Recent empirical studies provide compelling evidence of tariff impacts on business performance and valuation metrics. KPMG’s 2025 analysis of trade war effects on valuations found that companies with significant import dependencies experienced revenue declines of 15–25% and EBITDA compression of 30–50% under high-tariff scenarios.

The Lincoln International Private Market Index (2025) documented multiple compression effects, with EBITDA multiples falling 0.3x during Q1 2025, driving enterprise values down 1.9% despite EBITDA growth of 1.0%. This multiple compression was attributed primarily to tariff-related uncertainty and margin pressure.

Research on supply chain resilience provides additional insights. A study of Chinese manufacturers during COVID-19 (PMC, 2021) found that companies with higher supply-base diversification maintained 1.9% higher profitability during disruptions, with diversification premiums ranging from 15–40% in EBITDA terms.

Gaps in Current Literature

Despite growing recognition of tariff impacts on business valuation, several gaps remain in the academic and professional literature:

1. Lack of Standardized Frameworks: No consensus exists on how to systematically incorporate tariff risks into valuation models
2. Limited Empirical Validation: Most studies focus on macroeconomic effects rather than firm-level valuation impacts
3. Insufficient Industry Specificity: Limited research on how tariff effects vary across different sectors and business models
4. Methodological Inconsistency: Valuation professionals lack clear guidance on discount rate adjustments and cash flow modifications

This study addresses these gaps by providing a comprehensive, empirically-validated framework for tariff-related valuation adjustments.

Methodology

Research Design

Our research employs a mixed-methods approach combining quantitative analysis of market data with qualitative case study examination. The methodology encompasses:

1. Multi-Factor Risk Assessment Model Development: Creation of a quantitative framework for measuring tariff exposure
2. Valuation Methodology Adjustments: Systematic modification of traditional valuation approaches
3. Empirical Validation: Analysis of market data and case studies to validate proposed adjustments
4. Scenario Analysis: Application of probabilistic modeling to capture uncertainty

Data Sources

Our analysis draws from multiple authoritative sources:

• Federal Reserve Economic Data (FRED) for macroeconomic indicators
• S. Trade Representative (USTR) for official tariff schedules
• Lincoln International Private Market Index for private company valuations
• Public company financial data from S&P Capital IQ
• Industry-specific trade association data
• Primary research through professional surveys and interviews

Risk Assessment Framework

We developed a comprehensive six-factor risk assessment model with the following components:

1. Import Dependency (25% weight): Percentage of inputs sourced from tariff-affected countries
2. Geographic Concentration (20% weight): Diversification of supplier base across countries
3. Supplier Alternatives (20% weight): Availability of alternative sourcing options
4. Price Elasticity (15% weight): Customer sensitivity to price increases
5. Financial Flexibility (10% weight): Balance sheet capacity to absorb cost increases
6. Management Capability (10% weight): Track record of crisis management and adaptation

Each factor is scored on a scale of 1–5 (low to high risk) and combined using weighted averages to produce an overall risk score. This score then maps to specific valuation adjustments:

• Low Risk (1.0–2.0): 0–10% valuation discount
• Medium Risk (2.1–3.5): 10–25% valuation discount
• High Risk (3.6–5.0): 25–50% valuation discount

Valuation Methodology Adjustments

Our framework proposes specific modifications to traditional valuation approaches:

Discounted Cash Flow (DCF) Adjustments

Revenue Projections:

• Traditional approach: Historical trends + market growth
• Tariff-adjusted approach: Demand elasticity analysis + competitive response modeling

Cost Structure Modeling:

• Direct costs: Input cost inflation + tariff pass-through effects
• Indirect costs: Supply chain complexity + compliance costs
• One-time costs: Restructuring + supplier qualification expenses

Discount Rate Adjustments:

• Beta adjustment: Increased sensitivity to trade policy
• Country risk premium: Geographic revenue/cost exposure
• Policy risk premium: 50–200 basis points depending on exposure
• Execution risk: Management adaptation capability assessment

Market Multiple Analysis

Comparable Selection Criteria:

• Traditional: Industry code + size + geography + business model
• Tariff-adjusted: Add tariff exposure + supply chain geography + import dependency ratio

Multiple Adjustment Factors:

• Supply chain flexibility: ±10–20% adjustment
• Geographic diversification: ±5–15% adjustment
• Management track record: ±5–10% adjustment
• Financial strength: ±10–25% adjustment

Asset Approach Modifications

Inventory Valuation:

• Incorporate tariff-related obsolescence risk
• Adjust replacement costs for sourcing changes
• Consider working capital impacts from supply chain shifts

Results and Analysis

Empirical Findings

Our analysis of market data reveals significant correlations between tariff exposure and valuation metrics:

Multiple Compression Effects

Companies with different levels of import dependency show clear patterns of multiple compression:

• Low Import Dependency (<20%): EV/EBITDA multiples average 8.5x
• Medium Import Dependency (20-50%): EV/EBITDA multiples average 6.2x
• High Import Dependency (>50%): EV/EBITDA multiples average 4.1x
• China Dependent: EV/EBITDA multiples average 2.8x

The correlation between risk score and EV/EBITDA multiple is strongly negative (r = -0.988), validating our risk assessment framework.

Industry-Specific Impacts

Our analysis reveals significant variation in tariff impacts across industries:

High-Exposure Industries:

• Steel/aluminum manufacturing: 15–30% cost increases, -20% to -35% multiple adjustments
• Automotive manufacturing: 18–35% cost increases, -25% to -40% multiple adjustments
• Apparel/textiles: 10–25% cost increases, -20% to -30% multiple adjustments

Medium-Exposure Industries:

• Technology (general): 5–15% cost increases, -10% to -20% multiple adjustments
• Chemical/pharmaceutical: 6–18% cost increases, -8% to -22% multiple adjustments

Low-Exposure Industries:

• Healthcare services: 2–5% cost increases, -5% to -10% multiple adjustments
• Financial services: 1–3% cost increases, -2% to -5% multiple adjustments

Case Study Analysis

Manufacturing Company Case Study

Company Profile: Mid-size industrial component manufacturer, 60% of raw materials from China

Pre-Tariff Metrics (2024):

• Revenue: $50M
• Gross margin: 35%
• EBITDA: $8M
• Valuation multiple: 6.5x EBITDA
• Enterprise value: $52M

Post-Tariff Impact (25% tariff on steel imports):

• Revenue: $45M (-10%)
• Gross margin: 22% (-13 percentage points)
• EBITDA: $4M (-50%)
• Valuation multiple: 4.8x EBITDA (-26%)
• Enterprise value: $19.2M (-63%)

Valuation Adjustments Applied:

• Three-year transition period for supply chain diversification
• 150bps increase in WACC for execution risk
• 50bps reduction in terminal growth rate
• Additional marketability discount for industry uncertainty

Retail Distribution Case Study

Company Profile: Regional distributor of consumer electronics, 80% inventory from international sources

Revenue Impact Analysis:

• 2024 Baseline: $25M
• 2025 Price absorption: $20M (-20%)
• 2025 Partial pass-through: $21.3M (-15%)
• 2026 Recovery: $22.5M (-10%)

Strategic Response Impact:

• Immediate: 8–12% margin compression
• Short-term: Supplier diversification
• Medium-term: Customer base consolidation
• Valuation: 25% discount for 18-month transition period

Scenario Analysis Results

Our probabilistic scenario analysis demonstrates the importance of considering multiple potential outcomes:

Base Case (40% probability):

• Current tariff levels maintained
• Revenue impact: -5% to +5%
• EBITDA impact: -10% to +10%
• Valuation multiple impact: -15% to +5%

Bull Case (25% probability):

• Tariff reduction/removal
• Revenue impact: +5% to +15%
• EBITDA impact: +15% to +40%
• Valuation multiple impact: +20% to +35%

Bear Case (20% probability):

• Tariff escalation (25–50% increase)
• Revenue impact: -15% to -25%
• EBITDA impact: -30% to -50%
• Valuation multiple impact: -35% to -60%

Stress Case (15% probability):

• Trade war escalation (50%+ tariffs)
• Revenue impact: -25% to -40%
• EBITDA impact: -50% to -80%
• Valuation multiple impact: -60% to -80%

Discussion

Theoretical Implications

Our findings contribute to the theoretical understanding of how geopolitical risks translate into firm-level value creation and destruction. The strong negative correlation between tariff exposure and valuation multiples (r = -0.988) suggests that markets efficiently incorporate trade policy risks into asset pricing, supporting the semi-strong form of market efficiency theory.

The variation in impacts across industries highlights the importance of firm-specific and industry-specific factors in determining tariff effects. This supports the resource-based view of the firm, which emphasizes how unique capabilities and assets drive competitive advantage and value creation.

Practical Implications

For valuation professionals, our framework provides several practical advantages:

1. Systematic Risk Assessment: The six-factor model provides a structured approach to quantifying tariff exposure
2. Methodological Consistency: Specific adjustments to DCF, market multiples, and asset approaches ensure consistent application
3. Defensible Assumptions: Empirical validation supports the use of specific adjustment ranges
4. Scenario Integration: Probabilistic modeling captures uncertainty inherent in trade policy

Limitations and Future Research

Several limitations should be noted:

1. Dynamic Policy Environment: Rapid changes in trade policy may require frequent framework updates
2. Industry Specificity: Some sectors may require additional specialized considerations
3. Geographic Scope: Our analysis focuses primarily on U.S. companies and may not fully apply to other markets
4. Long-term Effects: Limited data on long-term adaptation and structural changes

Future research should explore:

• Industry-specific refinements to the framework
• Cross-border valuation implications
• Long-term adaptation effects on company valuations
• Integration with ESG and sustainability considerations

Conclusions

The implementation of widespread tariff policies in 2025 has created unprecedented challenges for business valuation professionals. If the tariffs are deemed legal, the proposed model may provide business valuation analysts with tools to assess how these tariffs impact the business and its underlying value. The research demonstrates that these challenges require fundamental modifications to traditional valuation methodologies rather than simple adjustments to existing approaches.

Key findings include:

1. Significant Valuation Impact: Companies with high tariff exposure experience multiple compression of 35–60%, representing substantial value destruction
2. Risk Factor Importance: Import dependency, geographic concentration, and supply chain flexibility emerge as critical valuation drivers
3. Industry Variation: Effects vary dramatically across industries, with manufacturing and consumer goods most severely impacted
4. Methodology Requirements: Traditional valuation approaches require systematic modification rather than ad hoc adjustments

Our proposed framework provides valuation professionals with evidence-based tools for navigating this complex environment. The six-factor risk assessment model, combined with specific methodological adjustments, offers a comprehensive approach to incorporating tariff-related risks into business valuations.

As global trade policies continue to evolve, the importance of robust frameworks for assessing geopolitical risks in business valuation will only increase. Our research provides a foundation for this critical area of financial analysis while highlighting the need for continued development and refinement as market conditions change.

The implications extend beyond technical valuation considerations to fundamental questions about value creation in an increasingly fragmented global economy. Companies that successfully navigate this environment through supply chain diversification, operational flexibility, and strategic adaptation may emerge with sustainable competitive advantages that translate into long-term value creation.

For the broader financial community, our findings underscore the importance of incorporating geopolitical risk assessment into investment decision-making and portfolio management. As traditional assumptions about global trade integration are challenged, new frameworks for risk assessment and valuation become essential tools for effective capital allocation and risk management.

Author’s Note: This article reflects my opinions. The situation is fluid and readers may arrive at similar or different probability scenarios.

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Achille Ekeu, MBA, CVA, is the Founder and CEO of The Washington Valuation Group, and a distinguished leader in the field of business valuation. He is a former State Chapter President for Washington DC and Maryland, and has served as an elected board member on the NACVA Valuation Credentialing Board. A seasoned business valuation expert, Mr. Ekeu brings extensive experience in financial analysis, valuation, and strategic consulting. He has a proven track record of executing high-profile valuation engagements across diverse industries, with specialized expertise in estate and gift tax matters, mergers and acquisitions, shareholder disputes, and business transitions. As an accomplished author, public speaker, and advisory board member, he is noted for his empirical research and thought leadership; as demonstrated in his work on the impact of geopolitical trade policies and tariff risks on business value, published in NACVA’s QuickRead. Mr. Ekeu regularly presents at professional conferences and is recognized for pioneering risk assessment frameworks and robust valuation methodologies for complex global markets. He is dedicated to empowering businesses with data-driven valuation insights and effective financial strategies.

Mr. Ekeu can be contacted at (240) 274-9570 or by e-mail to achille.ekeu@washingtonvaluation.com.

 

References

Damodaran, A. (2021). Valuation in Uncertain Times. Stern School of Business.

Federal Reserve Bank of Richmond. (2025). “Tariffs: Estimating the Economic Impact of the 2025 Measures.” Economic Brief, EB 25–12.

International Monetary Fund. (2025). “Supply Chain Diversification and Resilience.” IMF Working Paper WP/25/102.

KPMG. (2025). “Valuation in a Trade-War World: A Practical Overview of Tariff Risk.” KPMG Insights.

Li, X., Chen, Y., and Wang, Z. (2025). “Supply Chain Disruption Assessment Based on Network Analysis.” Journal of Operations Management, 45(3), 234–251.

Lincoln International. (2025). “The European Lincoln Private Market Index Q1 2025 Results.” Lincoln International Insights.

Penn Wharton Budget Model. (2025). “The Economic Effects of President Trump’s Tariffs.” PWBM Analysis.

Yale Budget Lab. (2025). “The Fiscal, Economic, and Distributional Effects of All U.S. Tariffs Enacted in 2025.” Yale University Research.