Issue 27  June 9th 2025

April 2: a Turning Point for Valuations in a Tariff World

April 2, 2025 marks a date of significance for business valuation professionals.

On that date, the U.S. government announced a significant escalation in trade measures, leading to a rapid increase in the country's weighted-average tariff rate from approximately 2% to over 20% within days. This abrupt policy shift introduced substantial cost pressures and uncertainty for businesses.

How does tariff uncertainty impact business valuations? Compressed profit margins. Tariffs raise the cost of imported goods, squeezing profit margins for companies reliant on global supply chains. This compression can lead to reduced earnings before interest, taxes, depreciation, and amortization (EBITDA), a key valuation metric. Supply chain disruptions. Businesses may need to restructure supply chains to mitigate tariff impacts, incurring additional costs and operational challenges. This can significantly test business resilience. Increased risk and lower valuation multiples. Uncertainty around tariffs elevates perceived investment risk, leading investors to demand higher returns. This dynamic often results in lower valuation multiples for businesses. Delayed M&A activity. The uncertainty introduced by tariffs can stall mergers and acquisitions, as buyers and sellers struggle to agree on valuations amidst fluctuating market conditions. (Sources indicate that M&A activity did indeed slow down significantly post-April 2.)

All this may be true, but actual U.S. tariff policy has been all over the place. With such on-again, off-again uncertainty, why is April 2 still important for valuers when actual long-term tariff rates are an unknown?

The significance of April 2 lies not in resolving uncertainty, but in shifting the valuation landscape by: Announcing and implementing actual tariff measures, not just floating the idea. Quantifying their scale, with a major tariff hike taking the average rate from ~2% to over 20%. ** Providing initial market and policy responses — including commentary from the Congressional Budget Office, early corporate reactions, and visible shifts in investor behavior.

Thus, April 2 may mark the point at which tariffs moved from being a "risk" to being a "reality" — even if the full duration or scope was and is unclear.

How are you factoring in tariffs into your valuations, decision-making, or advice you are providing clients? Let me know!!

bvresources.com  

The Fair Value Tightrope

The Business Valuation Resource Panel (BVRP) of the Appraisal Foundation recently issued a very informative brief relating to fair value for financial reporting. It focuses on the unique professional relationships among appraisers, management, and auditors in producing reliable fair value estimates for financial reporting.

Each professional plays a unique role in this process, and the quality of their interplay often drives the result.

• Appraisers are expected to deliver independent, well-documented valuations that align with GAAP and PCAOB ("Public Company Accounting Oversight Board") standards.
• Management is responsible for the financial statements and must ensure timely, accurate data to support valuation work.
• Auditors evaluate assumptions, methods, and inputs with a focus on professional skepticism and audit evidence.

What are some common problems the PCAOB finds in fair value estimates?

• Insufficient testing of key assumptions, methods, or data inputs by auditors.
• Poor communication between companies, auditors, and appraisers, leading to gaps or errors.
• Inadequate documentation of audit work or lack of supporting evidence.
• Lack of professional skepticism by auditors when reviewing valuation conclusions.

This is why auditors seemingly ask endless questions of management and their appraisers.

What are the areas of inquiry that auditors commonly ask of appraisers?

• Prospective Financial Information (PFI): Questions about the reasonableness of projections, especially when they reflect significant changes from historical trends.
• Weighting of Valuation Approaches: Scrutiny over how different valuation methods are weighted, particularly when results vary widely.
• Disconfirming Evidence: Concerns about whether any information used contradicts key valuation assumptions.
• Use of Judgment: Requests for documentation or justification where professional judgment significantly influences the valuation.
• Methodology Changes: Inquiries about why valuation methods changed from prior periods and whether such changes impact fair value conclusions.
• Verifiability of Inputs: Questions where auditors are unable to independently confirm key assumptions or inputs.

Appraisers in turn should address such questions clearly and without undue complexity, support responses with evidence, and ensure conclusions are materially correct and consistent with workpaper documentation.

The BVRP brief concludes that fair value valuations for financial reporting require close coordination among appraisers, management, and auditors. And as these engagements often occur under tight deadlines and involve complex issues, early communication and clear documentation—especially from appraisers—are essential to avoid delays and ensure technical alignment throughout the process.

Given the above, you can see how engagements can easily go sideways.

What are your experiences with fair value audits?

bvresources.com