How Trump Tariffs Affect Small Business Sales, Valuations & Acquisitions
What happens to the value of a small business when tariffs suddenly increase its costs, disrupt its supply chain, or threaten its customers?
And if you're planning to buy or sell a business, how should you account for those risks when negotiating a deal?
These are important questions because tariffs don't just affect large manufacturers and international corporations.
They can also affect small businesses that have never imported or exported a single product.
A local restaurant, construction contractor, repair company, or service provider could experience financial consequences simply because its customers work for companies involved in international trade.
And when those effects begin showing up in financial statements, they can change how buyers, sellers, and lenders evaluate business acquisitions.
I've spent years discussing buying, selling, financing, and managing small and medium-sized businesses while controlling risk.
Today, I want to examine how tariffs can affect small business deals, why uncertainty matters so much, and what business owners should consider before making major financial decisions.
utomobile manufacturers maintained separate production facilities for the Canadian and American markets.
Cars sold in Canada were largely manufactured in Canada.
Cars sold in the United States were largely manufactured in the United States.
But maintaining separate production systems created inefficiencies.
The 1965 Auto Pact
In 1965, Canada and the United States signed the Automotive Products Trade Agreement, commonly known as the Auto Pact.
The agreement helped establish a more integrated automobile manufacturing industry.
Instead of requiring every factory to manufacture a wide variety of models for its domestic market, companies could specialize.
One plant might manufacture certain models for customers in both countries.
Another plant could produce different models.
The result was a more integrated production system.
From Free Trade to USMCA
North American trade integration continued through several major agreements.
1988: Canada and the United States signed a bilateral free trade agreement, which took effect in 1989.
1994: The North American Free Trade Agreement (NAFTA) took effect, including Mexico.
2020: The United States–Mexico–Canada Agreement (USMCA) replaced NAFTA.
Over time, businesses made investment decisions based on these trading relationships.
Factories were built in locations where production made the most economic sense.
Supply chains were organized across borders.
And companies developed systems that depended on goods moving relatively efficiently between countries.
This is why broad tariffs can create such significant disruption.
They introduce new costs into arrangements that were developed under different economic assumptions.
How Tariffs Increase Costs: The Toilet Paper Example
I live in Moncton, New Brunswick.
Our region has a significant forest products industry.
Wood processing generates materials such as sawdust and wood chips, which can be used to produce pulp.
That pulp can then be used to manufacture products such as toilet paper.
In the recording, I used an example involving toilet paper factories in New Brunswick and Pennsylvania.
It demonstrates how trade patterns can develop around geography and transportation costs.
Why New Brunswick Exports Toilet Paper to the United States
Consider the state of Maine.
It's geographically close to New Brunswick.
If a toilet paper manufacturer in New Brunswick can supply Maine retailers more efficiently than a factory located much farther away, buying from New Brunswick makes economic sense.
Meanwhile, parts of Ontario may be closer to American manufacturing facilities in Pennsylvania.
As a result, Ontario retailers might purchase products manufactured in the United States.
So one Canadian province exports toilet paper while another imports it.
That might sound strange until you look at the geography.
The purchasing decisions are based on efficiency.
What Happens When a 25% Tariff Is Introduced?
Now imagine a hypothetical 25% tariff applies to toilet paper imported from New Brunswick into the United States.
A retailer in Maine faces a decision.
Should it continue buying from New Brunswick and pay the tariff?
Or should it purchase toilet paper from a more distant American factory and pay additional transportation costs?
Either option could increase costs.
If the retailer continues purchasing the imported product and the entire tariff cost is passed through to consumers, the price increase could look like this:
| Item | Amount |
|---|---|
| Original purchase cost | $50.00 |
| Hypothetical tariff | 25% |
| Additional cost | $12.50 |
| New cost | $62.50 |
This simplified example assumes the tariff is fully passed through, with no offsetting changes in margins, sourcing, or other costs.
The point is that tariffs can interfere with established low-cost supply arrangements.
Why Consumers May Ultimately Pay More
A tariff is generally collected from the importer under the applicable customs rules.
But the economic burden may be distributed among importers, suppliers, retailers, and consumers.
Some businesses may absorb part of the increase.
Others may negotiate lower supplier prices.
And many will attempt to pass additional costs to their customers.
The outcome depends on the market.
However, when tariffs increase the cost of obtaining goods, businesses must find a way to deal with that additional expense.
And that can create inflationary pressure.
The Three Ways Tariffs Affect Small Businesses
When evaluating the effects of tariffs, I think it's useful to divide the consequences into three categories.
These are direct impacts, derivative impacts, and indirect impacts.
Each one creates different risks.
1. Direct Impacts: Higher Import Costs and Export Challenges
Direct impacts affect businesses that purchase goods from other countries or sell products into foreign markets.
Imagine you're a small manufacturer that imports most of its raw materials.
If tariffs increase the cost of those materials, your production costs rise.
Now you have to decide what to do.
The Aluminum Manufacturer Example
In the video, I discussed a social media post from a small American manufacturer named Derek Turner.
According to the post, approximately 80% of his cost of goods sold consisted of imported aluminum components.
He was concerned about a 25% tariff affecting those components.
That's a significant problem for a manufacturer.
If a large portion of your costs suddenly increases, your gross profit margin can decline dramatically.
What Can the Business Owner Do?
There are several possible responses.
The business could raise its selling prices.
It might look for alternative suppliers.
It could negotiate with existing suppliers.
Or it could attempt to redesign its products to use different materials.
But none of these solutions is necessarily easy.
Raising prices may reduce customer demand.
Changing suppliers can create quality or reliability concerns.
And redesigning products may require additional investment.
Exporters Face the Opposite Problem
Now consider the foreign company supplying those aluminum components.
If its American customers face higher costs, they may reduce their orders.
The exporter could lose revenue even though it isn't the company directly paying the import tariff.
That's how tariffs can affect both sides of an international transaction.
2. Derivative Impacts: Your Customers May Be Affected
Derivative impacts occur when your business serves customers that are directly affected by tariffs.
You might not import or export anything yourself.
But your customers do.
And if their financial position deteriorates, your business may suffer.
Example: An Industrial Electrical Contractor
Imagine you operate an electrical contracting company in Pennsylvania.
One of your largest customers is a paper mill.
You maintain electrical systems, repair equipment, and perform installation work.
Now suppose that mill exports a significant portion of its production to Canada.
If retaliatory tariffs reduce demand for its products, the mill may respond by reducing expenses.
It could postpone equipment upgrades.
It might cancel maintenance projects.
And it may reduce spending on outside contractors.
Suddenly, your electrical contracting business has less work.
Accounts Receivable Can Become a Problem
There's another risk.
Suppose the mill begins experiencing cash flow problems.
Previously, it paid your invoices within 30 days.
Now payments are taking 45 days.
Then 60 days.
Eventually, you may face the possibility of not collecting the money at all.
This is why small business owners need to understand the financial condition of their customers.
A tariff problem affecting another company can quickly become a cash flow problem for you.
Review Your Customer Portfolio
If you operate a business-to-business company, examine your customer list.
Which customers depend heavily on international trade?
Which ones import materials?
Which ones export finished products?
And which customers could experience financial difficulty if their costs increase or sales decline?
This analysis can help you identify risks before they become obvious in your own financial statements.
3. Indirect Impacts: The Local Economy Can Affect Your Business
Indirect impacts occur when tariffs affect the broader economy surrounding your business.
This can be particularly important in communities that depend on major industrial employers.
Example: A Swimming Pool Contractor in Michigan
Imagine you operate a swimming pool construction company in Michigan.
Your customers are homeowners.
You don't export swimming pools.
And you may purchase most of your materials domestically.
At first glance, international tariffs might not seem especially relevant.
But what if a large percentage of your customers work in automobile manufacturing?
The North American automobile industry has highly integrated supply chains.
Components may cross international borders multiple times during production.
If trade restrictions disrupt production, employers may reduce hours, postpone hiring, or temporarily suspend operations.
How That Affects Consumer Spending
A homeowner concerned about job security may decide not to install a swimming pool.
Another customer might postpone a home renovation.
Families may reduce spending on restaurants, entertainment, and other discretionary purchases.
So your business can experience declining demand even though it has no direct involvement in international trade.
Why Local Economic Research Matters
This is particularly important when evaluating a business acquisition.
If you're buying a local service business, investigate the community's major employers.
Where do customers earn their money?
Which industries support the local economy?
And how exposed are those industries to international trade?
You may discover that a seemingly stable local business depends indirectly on a handful of large employers.
Why Tariff Uncertainty Can Be as Damaging as the Tariffs Themselves
One of the biggest problems with changing trade policies is uncertainty.
Business owners make decisions based on expectations about the future.
They invest in equipment.
They hire employees.
They expand facilities.
And they purchase other businesses.
Those decisions often require years to generate an acceptable return.
But when the rules can change unexpectedly, business owners become more cautious.
As I explained in the video:
"Business thrives on predictability." —David C. Barnett
Why Businesses Delay Investment
Imagine you're considering a $2 million manufacturing expansion.
You expect the investment to increase production capacity and generate additional profits over the next eight years.
But the profitability of that investment depends on your ability to sell products across an international border.
If you don't know what tariffs will apply next year, you may decide to postpone the project.
That decision might be reasonable from your perspective.
But it also affects the businesses that would have supplied construction services, equipment, and materials for the expansion.
Why Cash Becomes More Valuable During Uncertainty
When businesses are uncertain about future conditions, they often preserve cash.
They postpone unnecessary expenditures.
They delay hiring.
And they avoid committing to investments that could become difficult to reverse.
I saw similar behavior during the early stages of the COVID-19 pandemic.
Many businesses reduced spending because they didn't know what would happen next.
That same caution can appear when trade policy becomes unpredictable.
Can Small Businesses Adapt to Tariffs?
Yes, but adapting can be expensive.
Businesses have several potential options.
The right approach depends on their industry, customers, suppliers, and financial resources.
Find New Customers in Different Markets
A Canadian manufacturer that previously sold heavily into the United States might explore customers elsewhere in Canada.
It could also investigate European or other international markets.
However, entering new markets takes time.
You may need new distribution relationships, marketing efforts, and regulatory approvals.
Find Alternative Suppliers
If imported materials become more expensive, a business might look for domestic suppliers.
But those suppliers may not have sufficient capacity.
Their prices may already be higher.
And changing suppliers could create new logistical or quality-control problems.
Move Production to Another Country
Another option is relocating production.
For example, a Canadian manufacturer could establish operations in the United States to serve American customers.
But relocating production requires investment.
The company may need facilities, equipment, employees, and new supplier relationships.
Those costs eventually need to be recovered.
Use Local Subcontractors
Instead of relocating the entire business, a company could subcontract production to a manufacturer in the destination market.
A Canadian company selling to American customers might arrange for an American manufacturer to produce the goods locally.
This could reduce exposure to certain cross-border tariffs, depending on the applicable rules and sourcing arrangements.
However, it introduces new challenges involving quality control, supplier management, and production oversight.
Acquire a Business in Another Country
A company could also purchase an existing manufacturer in the country where it wants to sell.
That acquisition might provide local production capacity.
But it creates a new set of acquisition and integration risks.
And the buyer must consider whether the additional operating complexity is justified.
Why Moving Production Can Reduce Efficiency
Let's consider a manufacturer producing 1,000 units annually.
Before tariffs, it operates one factory.
That factory produces all 1,000 units efficiently.
Now suppose tariffs encourage the company to manufacture 20% of its products in another country.
The company may need to manage two production facilities.
That could mean additional accounting systems, payroll administration, suppliers, employees, and regulatory obligations.
But the company is still producing the same total number of units.
Its administrative costs may increase without any corresponding increase in sales.
The Hidden Cost of Duplicating Operations
When companies divide production across multiple facilities, they may lose some of the efficiencies associated with specialization.
They might need additional management.
They could face smaller production runs.
And they may need to maintain more inventory across different locations.
These costs can reduce profitability.
So even when a business successfully reorganizes its supply chain, it may still need to increase prices to maintain acceptable margins.
How Tariffs Affect Small Business Valuations
Now let's turn to the part of this discussion that's particularly important for business buyers and sellers.
How do tariffs affect the value of a business?
The answer depends on how they influence future earnings and risk.
A business is generally valued based on its ability to generate economic benefits for its owner.
If tariffs increase costs, reduce sales, or create uncertainty about future performance, buyers may become less willing to pay the same price.
Example: A Manufacturer Experiences a 30% Sales Decline
Imagine a manufacturing company has generated consistent growth for several years.
Its revenue has increased steadily.
Profit margins have remained healthy.
And the owner is preparing to sell.
Then tariffs affect its imported materials.
The company raises prices to compensate.
Customers reduce their orders.
And annual sales decline by 30%.
Profitability may fall even more sharply because the company still has fixed expenses.
Suddenly, the financial statements show a very different business.
Why Buyers Become Concerned
Before the tariffs, a buyer could examine several years of consistent performance.
That history provided some confidence about future earnings.
But now there's a major interruption.
The buyer must determine whether the decline is temporary or permanent.
Will customers return?
Will the company find alternative suppliers?
Will profit margins recover?
And how long will that recovery take?
Those questions introduce uncertainty.
And uncertainty can affect valuation.
Why Buyers May Discount a Business After Tariff Disruptions
A seller may argue that the business would still be highly profitable if tariffs hadn't been introduced.
That may be true.
But a buyer is purchasing the business under the conditions that exist at the time of the transaction.
The buyer must consider what the company is likely to earn in the future.
Historical Earnings May No Longer Be Reliable
Suppose a company generated $300,000 in annual earnings for several years.
Then tariff-related disruptions reduced earnings to $120,000.
The seller might argue that the business should still be valued based on its historical $300,000 performance.
But the buyer may question whether those earnings will return.
The buyer might not be willing to pay a price that assumes a full recovery.
Why a Lower Purchase Price Isn't the Only Solution
Sometimes buyers and sellers can structure transactions to share the uncertainty.
Rather than agreeing on one fixed price paid entirely at closing, they may use contingent payments.
This brings us to earnouts and seller financing.
How Earnouts Can Help Buyers and Sellers Manage Tariff Risk
An earnout is a transaction structure where part of the purchase price depends on the business achieving agreed financial results after closing.
For example, imagine a seller believes the company's earnings will recover once trade conditions stabilize.
The buyer isn't convinced.
Instead of ending negotiations, they could agree on a lower upfront payment with additional compensation if the business performs well.
Example: A Performance-Based Earnout
Suppose the parties agree to a hypothetical transaction with the following structure:
| Payment component | Amount |
|---|---|
| Payment at closing | $600,000 |
| Additional payment if agreed performance targets are achieved | Up to $200,000 |
| Maximum total consideration | $800,000 |
Illustrative figures only.
The seller receives $600,000 at closing.
If the company meets the agreed financial targets, the seller may receive up to another $200,000.
This gives the seller an opportunity to benefit from a recovery.
But it protects the buyer from paying the entire amount upfront for earnings that may not materialize.
Seller Financing Can Also Be Structured Around Performance
Another option is seller financing.
The seller agrees to receive part of the purchase price over time.
Depending on the agreement, some payment obligations may be linked to future sales or earnings.
However, these arrangements require careful legal and financial structuring.
The parties need clear definitions of performance, reporting obligations, payment conditions, and dispute-resolution procedures.
The goal is to allocate uncertainty between the buyer and seller in a way both parties can accept.
Why Trade Exposure Should Become Part of Acquisition Due Diligence
If you're buying a business that could be affected by tariffs, traditional due diligence may not be enough.
You still need to examine financial statements, customer concentration, supplier relationships, and operating systems.
But you should also investigate the company's exposure to international trade.
Investigate Customer and Supplier Geography
Start by identifying where the business's major suppliers and customers are located.
Does the company import materials?
Does it export products?
Do its customers rely on international markets?
And are any important suppliers located in countries affected by trade restrictions?
Understand the Company's Cost Structure
If the business imports goods, determine how much of its cost of goods sold is exposed to tariffs.
A company importing 5% of its materials may face a very different risk from one importing 80%.
You also need to understand whether the business can pass additional costs to customers.
Review the Local Economy
For consumer-facing businesses, examine the industries supporting local employment.
A restaurant in a community dominated by export-oriented manufacturers may have more tariff exposure than its own purchasing records suggest.
Assess Alternative Supply Arrangements
Could the business obtain materials from different suppliers?
Would switching suppliers increase costs?
Would it require new equipment or changes in production?
And how long would the transition take?
These questions can help you determine whether the business has realistic options if trade conditions change.
Tariff Risk Due Diligence Checklist
| Due diligence area | Questions to ask |
|---|---|
| Imported materials | What percentage of costs depends on imported goods? |
| Export revenue | How much revenue comes from foreign customers? |
| Customer exposure | Are major customers vulnerable to tariffs? |
| Supplier concentration | Can alternative suppliers provide the same materials? |
| Gross profit margins | Can the business absorb additional costs? |
| Pricing power | Can higher costs be passed to customers? |
| Customer demand | Will price increases reduce sales volumes? |
| Accounts receivable | Are affected customers taking longer to pay? |
| Local employment | Does the community depend on trade-exposed employers? |
| Capital requirements | Will the business need new facilities or equipment? |
| Historical performance | Have tariffs already interrupted earnings? |
| Recovery assumptions | What evidence supports the expected recovery? |
| Financing | Will lenders finance the acquisition under the proposed terms? |
| Deal structure | Could an earnout or contingent seller note help manage risk? |
The more exposed the company is to international trade, the more important these questions become.
What Tariffs Mean for Business Sellers
If you're planning to sell a business, tariff-related disruptions can create difficult valuation conversations.
Buyers may become more cautious.
Lenders may require additional evidence of stable cash flow.
And a decline in earnings can make the company harder to value.
You May Need to Rebuild Your Financial Track Record
Suppose your company experiences a major decline because of trade disruptions.
Even if the business eventually recovers, prospective buyers may want to see evidence that the recovery is sustainable.
That could mean operating the company for another couple of years before selling.
The objective is to establish a new period of consistent financial performance.
Buyers Won't Necessarily Pay for an Expected Recovery
You might believe tariffs will eventually disappear.
You may expect customers to return.
And you could be confident that earnings will recover.
But buyers may not be willing to pay upfront for that expectation.
As I discussed in the video, buyers may prefer an earnout or another structure that compensates the seller if the recovery actually occurs.
Prepare to Explain Your Trade Exposure
If your company depends on international trade, be ready to explain how tariffs affect its operations.
Show buyers what percentage of revenue and expenses is exposed.
Explain what changes you've already made.
And provide evidence supporting your future earnings expectations.
The more clearly you can demonstrate the risks and your response to them, the easier it may be for buyers to evaluate the opportunity.
What Tariffs Mean for Business Buyers
If you're planning to acquire a business, tariffs don't necessarily mean you should stop looking.
There may still be attractive opportunities.
But you need to evaluate them carefully.
Don't Assume Historical Performance Will Continue
A company may have generated stable profits for ten years.
But if its economic environment has changed, those historical results may no longer provide a reliable forecast.
You need to understand the company's future earnings potential under different trade conditions.
Consider Downside Scenarios
What happens if imported material costs increase?
What if export sales decline?
What if major customers reduce spending?
And what happens if the business needs additional working capital to survive?
Testing these scenarios can help you determine whether the acquisition remains financially viable.
Structure the Transaction Around Risk
If the business faces significant uncertainty, you may want to negotiate contingent payments or other protections.
The objective is to avoid paying for financial performance that may not continue.
But remember that a lower purchase price doesn't automatically make a risky business a good acquisition.
The business still needs a credible path to sustainable cash flow.
Why Lenders May Become More Cautious
Business acquisition financing depends heavily on the lender's confidence that the company can generate enough cash flow to repay its debt.
If tariffs threaten that cash flow, lenders may become more conservative.
They might examine customer concentration more closely.
They may question earnings forecasts.
Or they could require additional equity or collateral.
In the recording, I suggested that lenders would likely begin paying more attention to trade exposure when evaluating acquisitions.
That was my expectation at the time, not a verified statement about every lender's underwriting policies.
For buyers, the practical lesson is to discuss tariff exposure with potential lenders early.
You don't want to spend months negotiating a transaction only to discover that financing is unavailable under the proposed structure.
Can Tariff Uncertainty Affect the Entire M&A Market?
Yes.
Even businesses that aren't immediately affected by tariffs can experience consequences when buyers and investors become uncertain about the future.
A company considering a major acquisition may decide to wait.
A manufacturer planning a new facility might postpone construction.
And a business owner considering retirement may delay selling until financial conditions become more predictable.
Why Long-Term Investment Decisions Become Difficult
Imagine a European manufacturer wants to expand into North America.
Before trade uncertainty, it might evaluate where a single factory could most efficiently serve customers across Canada, the United States, and Mexico.
But if future trade barriers are unpredictable, choosing the factory's location becomes more complicated.
The company may decide to postpone the investment.
That decision affects construction contractors, equipment suppliers, engineering firms, and other businesses that would have participated in the project.
Uncertainty Can Have Lasting Effects
Even if tariffs are later reduced or removed, companies may remember how quickly the trading environment changed.
That experience can influence future investment decisions.
Businesses may place greater value on flexibility.
They might diversify production locations.
Or they may require higher expected returns before committing to projects exposed to international trade.
These responses can affect small businesses throughout the economy.
Why Small Business Ownership Always Involves Risk
I don't want this discussion to suggest that small businesses are suddenly too risky to buy.
Small business ownership has always involved uncertainty.
Economic conditions change.
Customers leave.
Competitors enter the market.
Regulations evolve.
And unexpected events can disrupt even well-established companies.
As I said in the video:
"Small businesses are the riskiest asset class there is to invest in." —David C. Barnett
The point isn't that you should avoid business ownership.
It's that you need to understand the risks you're accepting.
Cash Gives You More Options
One lesson I've emphasized repeatedly is the importance of maintaining financial flexibility.
A business with adequate cash reserves may be better positioned to survive a temporary decline.
It may have more time to find new suppliers or customers.
And it may be able to make decisions without immediately facing a liquidity crisis.
As I explained:
"Money is always the thing that gives you more options." —David C. Barnett
This is especially important when the future is uncertain.
Final Thoughts: Tariffs Change the Risks Buyers and Sellers Need to Evaluate
Tariffs can affect small businesses in ways that aren't immediately obvious.
They may increase the cost of imported materials.
They can reduce demand for exported products.
They may create cash flow problems for customers and suppliers.
And they can weaken local economies that depend on international trade.
For business buyers, this means trade exposure should become part of the due diligence process whenever it's relevant.
You need to understand where customers and suppliers are located, how the business responds to higher costs, and whether its historical earnings remain sustainable.
For sellers, tariffs may create difficult valuation discussions.
If the company's earnings have been disrupted, buyers may want evidence of recovery or transaction structures that reduce their exposure to uncertainty.
And for lenders, the company's ability to generate reliable future cash flow remains essential.
I believe there will continue to be opportunities to buy and sell good businesses.
But successful transactions require realistic expectations and careful evaluation of the risks.
The important question isn't simply whether tariffs will increase or decrease. It's whether the business you're buying or selling can remain profitable under the economic conditions it may face.
Learn More About Buying, Selling, and Valuing Small Businesses
If you're considering buying a business and want to understand how economic uncertainty, valuation, financing, and due diligence affect an acquisition, my Business Buyer Advantage programs can help.
I offer online training, group coaching, and consulting services designed to help buyers evaluate opportunities and manage acquisition risk.
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