Everyone knows that the deal environment has become more complex and challenging. Amid all the uncertainty in the global economy, it’s harder than ever to arrive at a valuation with confidence, so parties on both sides of the deal are doing more detailed, rigorous diligence. Even so, deal makers still tend to overlook trade policies and tariffs, which increasingly have the potential to destroy deal value. The five questions that follow can help you understand the role of trade and tariffs in determining deal value.
- Does the company rely on importing products anywhere in the world?
Executive leadership usually leaves it to operations (tax and logistics departments) to monitor and assess the impact of tariffs. But when a company contemplates an M&A transaction—a sale or a purchase—deal success can depend on understanding today’s tariff costs and prospects for how those costs could change. For buyers, underestimating the impact of tariffs can destroy deal value. For sellers, there is a risk that unresolved tariff problems can undermine the deal.
- How much does the target pay in tariffs, both in the U.S. and globally?
What products are subject to tariffs? A wide range of finished goods, sub-assemblies or raw materials. Who pays the tariffs—the supplier, the importer, or the customer? It may be any of the above: if an acquisition target is not the importer of the products it still may be paying. Relying only on high-level management estimates could result in margin contraction, quality issues, brand erosion, or market share volatility. Any of these surprise outcomes will undermine deal value.
- What are my competitors doing to manage tariff and trade issues?
Many investments have been damaged because management did not fully understand the marketplace and the strategies competitors use to manage tariff costs and other trade issues that impact profitability. Typically, some competitors find ways to mitigate or eliminate duties that gives their business an edge. Understanding these strategies should be part of diligence. This review should also look at whether the target has formula pricing, long-term contracts, commodity cost sensitivities or non-standard trade practices.
- How can we adjust the supply chain post-acquisition to reduce tariff costs?
You may find that a target seems to have a high tariff liability only to learn that the tariffs are recoverable, eliminating the need to adjust the supply chain in the short term. But if tariffs are not recoverable, adjusting the supply chain to avoid tariffs can have long-term benefits. In the current volatile environment, it is important to model all costs to understand where savings can be achieved. What will happen between the U.S. and China? How does the new United States–Mexico–Canada Agreement (USMCA) affect future tariff costs? It’s critical to answer these questions before a price is agreed.
- How have tariffs impacted the run rate earnings and are we paying the right premium?
“Are we paying too much?” is the question that haunts boards when they contemplate a deal. COVID-19 and volatile trade policies have made it more difficult to get a clear answer. Financial due diligence, therefore, must include a thorough, expert review of how tariffs impact EBITDA. In addition, complex and shifting tariff rules raise the risks of a violations—which can become a liability for the acquirer. Over the five-year statute of limitations period, these mistakes can be costly.
We know these are hard questions. And we have only scratched the surface. For more detailed answers, please see this recent white paper, Trade, Tariffs, and Deals: Keeping up with the Speed of M&A, which we wrote for Transaction Advisors. This paper goes into detail about the strategies for assessing trade risks and costs, avoiding tariff surprises, and mitigating tariff risks.
How KPMG helps buyers and sellers understand the impact of trade and tariffs on deals:
- KPMG Trade & Customs practice has the knowledge and the tools to quickly assess the current tariff environment and analyze the asset’s trade exposure. Our proprietary trade data and analytics applications can accurately calculate costs at various stages in the value creation process, down to the SKU level, or prepare a product cost model using client-directed assumptions. Our tools allow for immediate, real time updates that can be quickly evaluated and changed for various scenarios.
- KPMG Commercial Due Diligence partners work side-by-side with financial due diligence and tax experts, using proprietary tools, third-party databases, and industry knowledge and relationships to understand the competitive landscape.
- KPMG Operational Due Diligence experts can leverage our data and analytics platform to make informed decisions with a higher degree of confidence before investments are made.
- KPMG Financial Due Diligence helps determine the drivers of profit over time and whether they can be sustained. This helps build a realistic future earnings model for buyers and sellers.