The Impact of U.S. Tariffs and Reciprocal Tariffs on Canadian Business Valuations and Sale Transactions

Posted on April 10th, 2025 in Business Valuations, Cross-border Tax

Trade policies have a significant impact on business operations and financial performance. A 25% tariff imposed by the United States on all Canadian exports and reciprocal tariffs on U.S. imports would present serious challenges to Canadian businesses, affecting revenue streams, supply chains, profitability, and ultimately business valuations. Some broad factors to consider in valuations and potential Mergers and Acquisition (M&A) transactions are discussed in this article.

Specific Industry Effects

Manufacturing & Export-Driven Industries

Canada’s economy is heavily reliant on trade, with the U.S. being its largest trading partner. Tariffs by the U.S. government would significantly increase costs for U.S. importers purchasing Canadian goods, making Canadian products less competitive in the American market. Further, if reciprocal Canadian tariffs are implemented, Canadian businesses will be squeezed, from not only top-line revenue, but further from the cost of inputs. Manufacturing industries, such as automotive, steel, and aluminum would face declining sales and reduced margins. Potential considerations include pivoting to other markets and over a longer time, plant closures. Lower revenues and profitability would directly and negatively impact business valuations in these sectors.

Agriculture & Food Processing

Canadian agricultural exports, including beef, dairy, and grain, are dependent on U.S. consumers. A tariff would drive up prices for U.S. buyers, potentially leading to decreased demand and surplus inventory in Canada. This could cause financial distress for Canadian farmers and food processors, lowering company valuations due to revenue volatility and margin compression.

Valuation Implications

Discounted Cash Flow (DCF) Analysis

Given the potential decline in revenue and increase to Cost Of Goods Sold (COGS), businesses affected by tariffs would likely experience lower future projected cash flows. This would result in lower valuations under a DCF approach, as investors demand higher risk premiums for companies exposed to trade volatility. Additionally, the heightened uncertainty surrounding trade policies and future profitability would necessitate an increase in the discount rate, similar to what was experienced in the early days of the pandemic.

Market Multiples & Comparable Transactions

Companies in industries heavily reliant on U.S. exports may see lower Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) multiples due to diminished profitability and increased uncertainty. M&A activity could decline as investors adopt a more cautious stance, further suppressing valuations.

Goodwill & Intangible Asset Impairment

For companies with significant U.S. exposure, goodwill and intangible assets may be subject to impairment tests if earnings projections are revised downward. This could result in the write-down of assets and negatively impact balance sheet strength, further affecting business valuations.

Risk & Uncertainty

The unpredictability of tariff implementation being announced, delayed for 30 days, and then reinstated creates a volatile business environment. It appears implementation of tariffs are changing daily. This ongoing uncertainty increases the overall risk profile of affected companies, leading to higher discount rates in valuation assessments. Investors and valuators must account for this instability, as fluctuating trade policies impact revenue predictability and cost structures.

Mitigation Strategies & Long-Term Considerations

Diversification of Markets

Companies could explore alternative markets beyond the U.S., including Europe and Asia, to reduce dependency on American buyers. Establishing trade agreements with other nations could mitigate some of the risks associated with U.S. tariffs. Further, companies may want to focus efforts on the domestic market and look for new opportunities.

Operational Efficiencies & Cost Management

Businesses should focus on improving operational efficiencies, optimizing supply chains, and exploring domestic sourcing options to offset tariff-related cost increases. Optimizing supply chains, may require finding domestic sources for previously imported materials. Lean manufacturing and automation investments could help maintain profitability.

Uncertainty in M&A

In M&A transactions, one approach to bridge the valuation gap in such uncertain conditions is to utilize an earn-out structure, where a portion of the purchase price is contingent upon meeting specific revenue or earnings targets. This helps mitigate the risk for buyers while allowing sellers to capture the upside if financial performance remains strong despite tariff challenges.

A tariff on all Canadian exports into the U.S. and reciprocal tariffs on all U.S. imports would have widespread ramifications for Canadian businesses, with adverse effects on financial performance, growth prospects, and business valuations. Companies operating in export-driven industries would face the greatest challenges, and strategic adaptation would be essential to weather the economic impact. Parties contemplating M&A transactions and valuation professionals must consider these risks when assessing businesses with U.S. exposure, incorporating adjusted financial forecasts, increased discount rates, and sensitivity analyses to account for trade volatility.

If you have any questions or require assistance regarding the impact of U.S. tariffs and reciprocal tariffs on Canadian business valuations or sale transactions, please contact a member of our Financial Services Advisory Team (FSAT) team.