Tariffs are no longer just a procurement problem. For private equity-backed companies, they can quickly affect EBITDA, cash flow, covenants, valuation, and financial reporting.
That matters as year-end approaches. The numbers companies report now can take on greater significance when sponsors, lenders, and buyers start asking questions. Knowing where tariff exposure exists and whether the company can support the numbers behind it could make the difference.
Start With the Data: Can you Identify Tariff Costs?
The first question many companies should ask is surprisingly simple:
Can we accurately identify how much tariffs have cost us this year?
In practice, many companies bury tariffs in inventory purchases, freight accounts, or cost of goods sold. That may work for basic bookkeeping, but it creates problems when management needs to:
- Analyze margin erosion
- Forecast future profitability
- Support lender discussions
- Quantify pricing actions
- Defend EBITDA adjustments
- Build valuation models
More detailed reporting allows companies to track tariff-related costs separately through dedicated general ledger accounts, inventory attributes, cost centers, or reporting codes.
Without that visibility, management often has to reconstruct the analysis during budget season, lender updates, or a sale process — exactly when timelines are compressed and the numbers matter most.
Budgeting and Forecasting Have Become Critical
Looking backward at tariff costs is useful, but it is not enough.
Sponsors increasingly focus on three questions:
- What are tariffs costing today?
- What will they cost next year?
- How much of those costs can we recover through pricing actions?
As a result, tariff assumptions should be embedded directly into annual budgets and long-range forecasts. At a minimum, management should consider the following three models:
- Base Case: Assume the current tariff environment remains unchanged.
- Downside Scenario: Assume higher tariff rates or broader product coverage.
- Mitigation Scenario: Reflect alternative sourcing, supplier negotiations, production relocation, or successful customer price increases.
The goal is not to predict the future perfectly. It is to understand how sensitive EBITDA and cash flow are to a range of reasonable outcomes.
Companies that can model those scenarios quickly tend to give sponsors and lenders much more confidence than those companies that rely on broad, unsupported assumptions.
Inventory Accounting Considerations
For many manufacturers, distributors, and consumer product companies, tariff costs first appear in inventory. Tariffs incurred to bring inventory to its current location and condition generally become part of inventory cost. Higher inventory values can materially affect gross margin and inventory valuation metrics.
Management should consider:
- Whether the company appropriately capitalizes tariff costs into inventory
- Whether inventory purchased before tariff increases differs significantly from inventory purchased afterward
- Whether inventory valuation methods continue to accurately reflect the underlying economics
- Whether increased costs create inventory obsolescence or net realizable value concerns
- Where the taxpayer is part of a multinational group, it will be important to determine how much of the tariff costs were included in the COGS vis-à-vis how much is embedded in ending inventory when determining year end true-up adjustments.
EBITDA Margin Pressure May Affect More Than Earnings
It is natural to start with the income statement impact. For PE-backed companies, the bigger question is what happens when EBITDA declines.
Assume a company generates:
- Revenue: $100 million
- EBITDA: $15 million
- EBITDA margin: 15%
If tariffs increase annual costs by $2 million and the company cannot pass those costs to customers:
- EBITDA falls to $13 million
- Margin declines to 13%
- Enterprise value may decline significantly if valuation multiples remain constant
- At an 8x EBITDA multiple, a $2 million EBITDA reduction could lower enterprise value by approximately $16 million.
This is why sponsors ask for more than a general explanation of tariff pressure. They want a supportable analysis of exposure, recovery efforts, and mitigation plans.
Debt Covenants and Borrowing Capacity
Tariff exposure can also affect debt agreements quickly.
Many PE-backed companies must meet leverage, interest coverage, minimum EBITDA, or similar covenants. Higher tariff costs can pressure each of these metrics, particularly when pricing actions lag behind cost increases.
Management should evaluate:
- Will projected EBITDA reductions create covenant pressure?
- How much cushion remains under debt covenants?
- Will higher inventory costs increase borrowing base needs?
- Will the company need additional revolving borrowings?
- Could additional borrowing increase debt servicing costs in an increasing interest rate environment?
Many lenders now focus on tariff exposure when evaluating renewals, amendments, and refinancing transactions. Year-end forecasts should include covenant and liquidity modeling, not just earnings under generally accepted accounting principles.
Impairment and Valuation Considerations
Tariff pressure can also affect valuation and impairment analyses.
If tariffs materially reduce expected future cash flows, management may need to revisit several judgment-based estimates, including:
- Goodwill impairment analyses
- Long-lived asset recoverability
- Intangible asset valuations
- Ability to realize deferred tax assets
- Purchase accounting assumptions
What Buyers and Quality of Earnings Providers Will Ask
If your company is considering going to market in the next 12 to 36 months, tariff exposure is likely to come up during due diligence.
Expect buyers, lenders, and quality of earnings providers to ask:
- How much tariff expense did the company incur each year?
- How much did it recover through pricing actions?
- Which suppliers and products face exposure?
- What mitigation strategies are in place?
- How much future EBITDA is at risk?
- Are tariff impacts one-time or recurring?
- How do forecasts reflect tariff costs?
- Where are the company’s suppliers located?
- Has the company worked with its suppliers to revisit the cost base that impacts import price?
- Do suppliers (or intermediary brokers) provide a detailed breakdown of tariff costs instead of a single line item labelled “tariffs” without specific mapping to HTS codes and corresponding applicable rates?
Companies that can answer these questions clearly usually have a smoother due diligence process and a stronger basis for defending valuation.
Get Clarity on Your Tariff Exposure With CBIZ
Connect with a CBIZ advisor to understand how tariff changes could affect your financial reporting, planning, and business.
Frequently Asked Questions
In the U.S., the importer of record is generally responsible for paying tariffs and meeting customs requirements. That responsibility includes using the correct product classification, country of origin, and customs value. Companies should confirm who serves as the importer of record in supplier and purchasing agreements because the answer can affect both cost and compliance risk.
Yes. Some imported goods may be subject to a base duty plus additional tariffs tied to the product, material, or country of origin. Companies should review each product’s classification and origin rather than assume the highest listed rate is the only charge. A customs or trade advisor can help confirm which duties apply.
In some cases, companies may qualify for programs such as duty drawback, foreign-trade zones, bonded warehouses, or provisions for goods imported temporarily and later re-exported. Eligibility and savings depend on the product, transaction, and supporting documentation. Companies could work with their suppliers to reevaluate and rationalize the import costs to reduce adverse impacts. Companies should evaluate these options before changing sourcing or import practices.
Generally, yes. Tariffs and customs duties that are directly attributable to acquiring inventory are typically included in inventory cost under U.S. GAAP. However, companies should separately evaluate unusual freight, handling, storage, disruption-related, or other abnormal costs, as certain amounts may be required to be recognized as current-period expense rather than capitalized. The appropriate accounting treatment depends on the nature of the specific cost incurred. There can be significant impact on results due to timing and accounting treatment differences.
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