Valuation challenges: Pricing uncertainty in a volatile world
Tariffs continue to inject unpredictability into future cash flows, complicating traditional valuation models. For companies with international supply chains, elevated costs are eroding margins and distorting earnings projections.
In the Canada-U.S. corridor, these dynamics are particularly pronounced. Canadian firms importing U.S. components are grappling with inflated costs that skew EBITDA forecasts and complicate pricing. A 21% drop in cross-border deal volume in early 2025 reflects how risk premiums are being redefined. As a result, Canadian buyers are increasingly favoring domestic targets, setting the stage for a wave of intra-Canada consolidation, especially in manufacturing and logistics, where U.S. exposure is highest.
Recent tariff escalations have intensified this pressure. On August 1, 2025, the U.S. raised duties on non-CUSMA compliant Canadian goods from 25% to 35% and imposed 50% tariffs on steel and aluminum, even for CUSMA-compliant items. Canada responded with 25% tariffs on C$30 billion in U.S. goods, with another C$125 billion slated for later this year. Although partial rollbacks on Sept. 1, 2025 exempted $14.2 billion and $30 billion worth of U.S. goods, key sectors like steel, aluminum, and autos remain heavily taxed. The Oct. 14, 2025 imposition of new U.S. tariffs, including 10% on Canadian softwood lumber and 25% on upholstered wooden furniture, has heightened the urgency of strategic responses. These tariffs, added to earlier duties, are expected to substantially increase construction and furnishing costs, causing disruption across the North American housing market and constriction-adjacent industries.
These developments are reshaping valuation norms. Discounted deal pricing is increasingly driven not by underperformance but by elevated geopolitical risk. This prompts critical questions: Are investors adequately pricing in these risks? More importantly, how can they differentiate between transient shocks and enduring shifts in profitability?
To navigate this uncertainty, dealmakers are turning to scenario-based valuation models and sensitivity analyses that capture a spectrum of tariff-related outcomes. These tools support more informed pricing decisions and help reframe discounted valuations as strategic buying opportunities, particularly when long-term fundamentals remain strong.
Supply chain vulnerabilities further complicate the valuation landscape. Market volatility is resulting in companies reassessing their sourcing strategies. This raises a pivotal consideration: Should geopolitical risk audits become a standard component of M&A due diligence?
Sector-specific challenges: Uneven exposure and strategic repositioning
Industries are experiencing the trade war’s impact unevenly, with manufacturing, automotive, and consumer electronics among the hardest hit due to their reliance on cross-border components. Canadian firms in these sectors are reassessing U.S. partnerships, and several OEMs have delayed product launches amid tariff uncertainty. This mirrors strategic repositioning in the U.S., where companies like Volkswagen and Nintendo have adjusted pricing and timelines in response to trade disruptions.
The July 10, 2025 announcement of a 35% tariff on Canadian imports (effective August 1) further disrupted supply chains, particularly in manufacturing and agriculture. Despite exemptions for USMCA-compliant goods, Canada’s retaliatory tariffs have compounded economic uncertainty, leading to paused or delayed M&A activity in affected sectors.
At the same time, sectors with agile supply chains or domestic production bases are emerging as strategic winners. Canadian tech and clean energy firms, which are less reliant on U.S. imports, are attracting increased M&A interest bolstered by government incentives aimed at reducing trade dependency and promoting industrial self-sufficiency.
Implications of new U.S. tariff order for Canadian exporters
To mitigate sector-specific risks stemming from the escalating U.S.-Canada trade tensions, companies are adopting a range of strategic responses. Many are turning to vertical integration and onshoring to reduce reliance on foreign suppliers, thereby insulating operations from tariff volatility. Others are forming alliances and joint ventures to share tariff burdens and enhance operational flexibility, particularly in sectors like manufacturing and consumer goods where cross-border exposure is high.
In parallel, firms are leveraging geographic diversification through M&A to reduce concentration risk in high-tariff regions. This includes targeting domestic assets or expanding into markets with more stable trade relationships. Additionally, some companies are engaging in tariff engineering (i.e., reclassifying goods or shifting country-of-origin) to optimize trade flows and minimize cost impacts.
From a transaction perspective, buyers are prioritizing sectors with low U.S. exposure and strong pricing power, while demanding flexible deal structures such as earnouts and contingent pricing to hedge against uncertainty. Meanwhile, sellers in exposed sectors are repositioning assets, bundling them with more resilient units, or delaying market entry to avoid valuation compression and regulatory complications.
Cross-border challenges: Regulatory and operational friction
Tariffs often come hand-in-hand with regulatory scrutiny. Cross-border deals now face longer approval timelines, more complex compliance requirements, and increased political risk.
To navigate these hurdles, dealmakers are engaging regulatory counsel early in the process and structuring deals to mitigate national security concerns, such as through minority stakes or joint ventures. On the operational side, companies are incorporating logistics resilience into post-merger integration (PMI) plans and investing in digital supply chain visibility tools to monitor and adapt to disruptions in real time.
Currency volatility has added a new layer of complexity to deal structuring. The Canadian dollar’s fluctuations against the U.S. dollar have made currency hedging a standard feature in cross-border LOIs and SPAs. To bridge valuation gaps caused by tariff-induced uncertainty, dealmakers may increasingly turn to earnout structures and contingent pricing models. Separately, supply chain disruptions remain a major concern. Tariffs can reroute logistics, delay production, and inflate costs, factors that must be accounted for in integration planning. This raises a pressing question: Are acquirers sufficiently stress-testing post-merger supply chain.
Heightened due diligence is no longer optional. Investors and advisors must probe deeper into tariff exposure, political risk, and operational agility. The due diligence checklist is evolving, and dealmakers must decide if it should now include trade policy forecasting, scenario modeling, and contingency planning. Many firms are expanding their diligence scope to include trade policy risk assessments and engaging third-party geopolitical risk consultants for high-risk jurisdictions. These steps are helping acquirers anticipate regulatory delays, model downside scenarios, and build more resilient deal theses.
Looking ahead: Strategic M&A in a multipolar world
Despite the challenges, the M&A landscape is not retreating, it’s transforming. Leading companies are not allowing tariffs to derail their long-term strategies. Instead, they are using disruption as a catalyst for bold moves, future-proofing portfolios through scale, capability expansion, and divestitures.
This resilience invites reflection: Is your M&A strategy reactive or proactive in the face of geopolitical shifts? And perhaps more provocatively, can tariffs be leveraged as a strategic filter to identify undervalued assets or accelerate transformation?
BDO knows M&A
Tariffs are more than a policy tool—they are a signal of a changing global order. For investors, M&A advisors, and private equity professionals, the challenge is not merely to navigate this complexity, but to harness it. The winners will be those who ask the right questions, adapt their frameworks, and act with conviction in uncertainty. Reach out to our team for advice on your M&A strategy.