How QoE Analysis Can Uncover Financial Impact of 2025 Tariffs
As 2025 tariff measures begin to take effect, a key consideration for buyers evaluating an acquisition is how these policy changes will impact the target company’s future performance.
· On April 5, the U.S. implemented a 10 percent universal tariff on most imports.
· Country-specific tariff increases, ranging from 15 percent to 41 percent depending on the country, will ultimately be activated on Aug. 7, 2025, following a July 31 executive order.
Many businesses will incur higher input costs that are not yet reflected in their historical financials, making it essential to understand how management plans to address these increases. While some of the increased costs may be passed along to consumers, in many cases, additional costs will hit the company’s bottom line.
During financial due diligence, a Quality of Earnings (QoE) report should assess whether a pro forma adjustment is warranted to account for the impact of newly imposed tariffs on cost of goods sold (COGS) and inventory valuation. These adjustments provide a more accurate, forward-looking picture of normalized EBITDA.
Pro forma adjustments in a QoE analysis are designed to reflect material, recurring business impacts, whether positive or negative, that will affect future earnings. For example, if a company recently expanded production capacity through efficiency improvements, an upward EBITDA adjustment might be appropriate. Conversely, a non-transitory cost increase, like a newly implemented tariff, could compress gross margins and justify a downward adjustment to EBITDA.
Take, for instance, a company that imports electronic components from Japan and is now subject to a 15 percent tariff. Suppose management negotiates with its Japanese supplier to absorb five percent, plans to pass five percent along to customers, and retains the remaining five percent as a hit to margins. In that case, the QoE analysis should reflect this split. The EBITDA should be recast accordingly, and the balance sheet inventory values adjusted to reflect higher replacement costs under the new tariff regime, which will impact working capital needs
With tariffs now going into effect, financial statements will soon start to reflect these additional costs, through increases in inventory costs, decreases in gross margin or shifts in pricing strategies. This presents an opportunity for diligence teams to quantify the real financial impact and assess whether management’s mitigation plans are viable and sustainable.
Windham Brannon Can Help
If you’re considering a business acquisition in today’s shifting trade environment, it is imperative to engage a third-party CPA firm to conduct a thorough, GAAP-compliant financial analysis. Doing so means you’re buying based on real, adjusted earnings, not legacy numbers that ignore the ripple effects of trade policy changes. Windham Brannon’s Advisory Practice professionals know how to support your acquisition goals every step of the way using industry expertise and services tailored to your unique situation. For more information, contact your Windham Brannon advisor today, or contact Laura Berry at Windham Brannon.
