Business Valuations: Tariffs and TCJA Sunset

As of the writing of this article, the United States has imposed tariffs of 145% on China, 25% on non-USMCA trade from Canada and Mexico, and a 10% baseline tariff on approximately 90 other countries. These tariff proposals have shifted over the last several days, but the public markets have responded with swings, as analysts have expressed worries of a near-term bear market or recession. Regardless of one’s position on the current trade policies, it would be hard to argue that this period has not been marked by both volatility and uncertainty in the public markets. Given the impact of volatility and uncertainty on the private markets, now might be a good time to consider whether current market conditions create a strategic planning opportunity. 

At its core, the concept of business valuation for closely held operating businesses can be broken down into three elements: expected future cash flows, the growth of these cash flows, and the risk of achieving them. In the following sections, we will discuss ways in which the proposed tariff policies could impact valuations of closely held businesses. 

Expected Cash Flows (Lower Cash Flow = Lower Value) 

• Reductions in margins due to increased costs: Tariffs are essentially a tax on imported goods. Where possible, the cost of tariffs may be passed on through the supply chain to consumers, which is why tariffs are often known as being quasi-inflationary. However, several factors may cause a company in the supply chain to absorb a portion or all of the added cost of the tariff without the ability to pass it to the next part of the chain. This is especially true for small businesses who may have less negotiating power and/or who face competition from larger entities. All else equal, increased costs reduce cash flows.
• Reductions in revenues due to decline in demand: Increases in prices as well as decreases in consumer sentiment around the overall economy can lead consumers to reduce consumption, causing company revenues to suffer. All else equal, decreased revenues reduce cash flows. 

Growth (Lower Growth = Lower Value) 

• Delays and/or reductions in capital expenditures due to increased costs and uncertainty: For many businesses, capital expenditures are a large driver of growth, whether it be building a new factory, purchasing a new location, or even upgrading a piece of worn equipment. Delaying these projects (or scrapping them altogether) can lead to lower growth in both the near- and long-term. 
• Disruptions in supply chains: In a period of increasing uncertainty and rising prices, certain suppliers may leave a heavily impacted industry or go out of business altogether. Conversely, buyers may need to search for price efficiencies with new suppliers in order to preserve or defend margins. These supply chain disruptions could lead to difficulties sourcing products or inputs, delaying company growth. 

Risk (Higher Risk = Lower Value) 

• Increases in risk across the market: The proposed tariff policy is so broad in scope that it is difficult to quantify the large-scale impacts across numerous industries. As discussed throughout, this broad level of uncertainty raises risk.
• Increases in company-specific risk: Even though the proposed policy is broad in scope, every industry and individual company will be impacted differently. A similar company in the same industry as another may face higher company-specific risk based on numerous factors, including customer and supplier concentrations, relative size, geographic distribution, product diversification, management depth, etc. 

Additional Impacts on Value (Subject Interest Discounts) 

• The most common strategy for reducing potential estate taxes for business owners is by gifting some or all of a company’s ownership from a business owner to their children or a family member during their lifetime. For transfers for non-controlling interests, business valuators oftentimes utilize discounts for lack of control and lack of marketability which, in many cases, allows for a reduction in the value of the interest being gifted or valued for estate and/or gift purposes. Uncertainties related to tariff policy and the resulting market fallout may lead buyers to rethink or delay planned acquisitions and investments. This pullback in M&A activity would suggest increases in marketability discounts leading to reduced values of certain subject interests. 

Sunset of the Tax Cuts and Jobs Act 

An ownership interest in a closely held business can be the most significant asset in a family’s estate. For estate planning purposes or transfer tax purposes, determining the value of this ownership interest can be challenging and involves consideration of many factors. Any valuation report, whether it is for an estate tax filing or for a gift, is subject to IRS review and must meet the requirements of being a “qualified appraisal.”  

Under the Tax Cuts and Jobs Act of 2017 (“TCJA”), the exemption for estate and gift taxes is $13.99 million per individual/$27.98 million per married couple in 2025. This exemption level is set to sunset on January 1, 2026, and without action of Congress, would drop approximately 50% (~$7 million/~$14 million for individual and married, respectively). Given the lack of a solid majority in Congress and the prevailing economic uncertainties, analysts are unsure if Congress will be able to stop the sunsetting of this provision. 

The reduction in this tax exemption could impact family business owners and wealthy individuals. If you fall into one of these categories, you will lose your ability to transfer sizable pieces of your assets through utilizing current estate and gift tax planning options and taking advantage of the current annual exclusion limitations. In addition, business valuations for many companies may be impacted by volatility and uncertainty associated with the current economic environment. Given these factors, now is the time to begin planning and executing 2025 estate and gift tax moves.