Navigating Valuation in Uncertain Waters: How Tariffs and Global Instability Are Impacting North American Business Valuations

In today's interconnected world, business valuation doesn't happen in a vacuum. It’s shaped by a complex web of economic signals, investor sentiment, geopolitical tensions—tensions and increasingly, by government trade policy. At Welch, we keep a close eye on how these external forces affect our clients’ businesses, investments, and strategic decisions. One of the most pressing issues we're tracking today is tariff uncertainty and its ripple effect on North American business valuations.

On April 15, 2025, Kroll, a global leader in valuation benchmarks, announced an increase in their recommended U.S. Equity Risk Premium (ERP) from 5.0% to 5.5%—a notable adjustment that directly affects how we estimate discount rates for North American businesses. This shift reflects growing concerns in the financial markets, and it underscores what we’re seeing on the ground with clients across sectors: volatility is back, and uncertainty is taking a toll.

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What’s Driving the Increase in ERP?

Kroll points to three major drivers of risk, the first and most prominent being trade policy uncertainty. Earlier this month, the U.S. government made headlines with sweeping new tariffs—a sharp pivot in trade strategy that rattled global markets and injected a new level of unpredictability into cross-border commerce. While a temporary 90-day pause has been announced, baseline tariffs of 10% on most U.S. imports remain in effect, and the potential for escalated tariffs looms large.

Particularly concerning is the renewed tariff standoff between the U.S. and China. This tit-for-tat exchange is already reshaping global supply chains, complicating procurement strategies, and increasing input costs for many North American businesses. For valuation professionals, this means greater scrutiny around forecasted margins, supply chain reliability, and country-specific risks.

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Why This Matters for Business Valuations in Canada

Here in Ottawa—and across Canada—many of our clients operate in industries directly or indirectly affected by U.S. trade policy: manufacturing, technology, agri-food, logistics, and retail, to name a few. Whether you're exporting to the U.S., relying on components from China, or simply exposed to global supply chains, this new layer of trade unpredictability can impact everything from customer demand to working capital needs.

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In valuation terms, this translates to:

• Higher discount rates: The increase in ERP reflects higher perceived risk in future cash flows. This reduces present value, which can negatively affect enterprise valuations—especially for businesses with international exposure.
• Increased volatility in projections: With potential changes to tariffs happening almost daily, revenue and margin forecasts are harder to pin down. This makes scenario analysis and risk-adjusted forecasting more important than ever.
• Greater importance of geographic diversification: Companies with more diversified supplier bases and sales channels may be better positioned to weather trade-related shocks—and could command a valuation premium as a result.

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What We’re Advising Clients to Do

At Welch Capital Partners, we are working closely with business owners and CFOs to help them navigate these choppy waters. Some practical strategies we’re encouraging include:

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• Stress-testing your forecasts: Model the impact of 10%, 20%, or even 30% cost increases on key inputs. Proactively address how to mitigate or restructure your company to address these stressors.
• Scenario planning for exit timing: If you're contemplating a sale or financing event, consider how current volatility could influence timing, buyer appetite, and pricing.
• Reviewing capital structure: With global interest rate pressures mounting due to fiscal uncertainty and rising deficits, now is a good time to assess debt covenants, refinancing risk, and working capital flexibility.

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Final Thoughts

While the economic environment remains unpredictable, what is clear is that market participants are pricing in higher risk—and this is starting to show up in valuations. For business owners and investors, understanding how these macro forces are affecting your company’s value isn’t just a theoretical exercise—exercise, it’s critical to makingmake informed decisions in 2025.

If you have questions about how these shifts could affect your business value, M&A opportunities, or financing strategy, our team at Welch is here to help.