There were many stark differences between the two presidential candidates. Setting aside their personal demeanors, the Republicans and Democrats shared very little common ground concerning their vision for the Country. These differences could not have been more apparent than the issues of the economy, which included taxes, trade, and government regulation, to name a few. Today, Donald Trump will be sworn in for his second term, and all eyes will be focused on how quickly he will effectuate or abandon the economic policies he promised to fulfill.
Trump’s proposed economic initiatives expressed during his 2024 presidential campaign have sparked discussions across several industries. For valuation professionals and attorneys who hire experts, these policies are critical to understanding how they could affect the economic landscape and the value of their client’s businesses. The potential impact of Trump’s platform and his ability to effectuate the relative changes must be understood by professionals representing business owners.
Tax Policy Changes
Corporate Tax Reductions
Trump’s plan to reduce the corporate tax rate from 21% to 15% could directly increase the after-tax cash flows of many businesses, a primary driver of business value under the income approach. Capital-intensive industries, such as manufacturing, real estate, and energy, will benefit from a lower tax rate and higher net earnings.
- Example: A manufacturing company with pre-tax earnings of $5 million would save $300,000 annually under the lower tax rate. Assuming a 10% discount rate, this tax savings could increase the business’s valuation by approximately $3 million.
Elimination of Certain Taxes
Eliminating federal taxes on tips and Social Security benefits was initially considered to assist individuals; however, business owners now hope these changes would indirectly boost revenues in consumer-driven sectors. Increased disposable income for workers and retirees may lead to higher spending on discretionary goods and services.
- Example: Restaurants and hospitality businesses could see increased demand as workers have more disposable income. This revenue growth could drive up valuation multiples under the market approach.
Trade Policy
Universal Baseline Tariffs
Trump is steadfast in assessing a 10%-20% tariff on all imports. Depending on a company’s reliance on global supply chains, this could have a mixed impact. Companies reliant on imported raw materials or components would face higher costs, which could compress profit margins and decrease their valuation. Meanwhile, domestic businesses that compete with imports may see increased demand and improved profitability.
- Example: A furniture manufacturer importing $5 million in materials annually would incur an additional $500,000-$1 million in costs under a 10%-20% tariff. This would reduce earnings by 10%, resulting in lower valuation under both income and market approaches.
- Example: A U.S.-based steel producer could gain market share as import prices rise, enhancing its competitive position and valuation.
Targeted Tariffs
Additional tariffs on imports from specific countries (e.g., 25% on goods from China) could disrupt supply chains, increasing input costs and operational risks for affected businesses.
- Example: A technology company importing electronic components from China may face rising costs and delays, reducing margins and potentially increasing risk. This could decrease valuations by elevating discount rates or reducing future cash flows.
Regulatory Changes
Deregulation
Trump has made no secret that he believes government deregulation will lower compliance costs, particularly in industries like energy, manufacturing, and finance. Alternatively, while deregulation may boost short-term profitability, potential environmental or legal liabilities could negatively impact long-term valuation multiples.
- Example: An oil and gas company that saves money due to reduced environmental compliance requirements would increase free cash flow and potentially increase valuation under the income approach.
Energy Policy
Energy Independence
Trump has frequently proclaimed, “Drill, Drill, Drill”. His premise is that increasing domestic fossil fuel production will lead to lower energy costs for U.S. businesses, particularly in energy-intensive industries like manufacturing.
- Example: Lower energy costs improve operating margins, directly increasing valuations. A food processing company saving $250,000 annually on energy costs could see its valuation increase by $2.5 million, assuming a 10% capitalization rate.
- Example: Renewable energy companies may face reduced incentives or heightened competition, potentially lowering their valuations. A company like this reliant on federal subsidies may experience declining demand, negatively affecting future cash flows and valuation.
Inflation and Interest Rates
Inflationary Pressures
Tariffs and expansive fiscal measures could contribute to inflation, leading to higher interest rates. Higher interest rates increase the cost of capital, reducing the present value of future cash flows.
- Example: A retail chain with projected annual cash flows of $2.5 million over 10 years could see its valuation decrease by $5 million if the discount rate rises from 10% to 12%.
Consumer Behavior
Inflation typically reduces consumer purchasing power, negatively impacting businesses reliant on discretionary spending.
- Example: A luxury goods retailer may see declining revenues as consumers prioritize essential goods, reducing profitability and valuation.
Federal Deficit and Economic Stability
Increased Federal Debt
Trump’s proposed policies are untested, and any claimed guarantees are equally questionable. While stimulating growth in some areas, some may believe it will increase the federal deficit, leading to market uncertainty and higher risk and adversely affecting the valuations of businesses.
While tax reductions and deregulation may boost profitability and valuations in specific sectors, trade tariffs, inflation, and federal debt could introduce risks that negatively affect others. As business valuation experts, our firm policy will now be to conduct sensitivity analyses to understand how these policies impact key valuation drivers such as revenue, margins, and discount rates. For industries heavily reliant on imports or government incentives, proactive adjustments to business strategies could mitigate potential valuation declines.
So, if you have carefully read this blog, written the day before Donald Trump was sworn in for his second term, you may have noticed that I summarized the pros and cons of his campaign promises. No one, including myself, can predict how these initiatives will ultimately affect the U.S. economy or the valuation of businesses. We don’t know if any of the above will be enacted.
But I can tell you this: If I knew how any or all of the items discussed herein would affect the value of business, I would have written this blog from a beach in Antigua between Facetiming my two grandchildren. Rest assured, this blog was written from my desk in Rockefeller Center.
If you or your clients require a business valuation report, don’t hesitate to get in touch with our office at 646.661.3800. Alternatively, you may visit our website at www.msgcpa.com or email me at msgcpa@msgcpa.com.
Schedule a Case Inquiry with our Office