By Paul B. Finch, MBA & Susan Winters Finch, MS, MBA | 4/20/2025

Make no mistake about it, market uncertainty associated with Trade Wars creates risk, and perceived risk reduces valuations. In a nutshell, this is exactly what we see playing out in the recent stock market turmoil and it’s not isolated to just publicly traded stocks, it is also being felt by private companies from start-ups to merger and acquisition activity, wherever equity transactions are occurring.

The fundamentals are as follows:

· All equity investors have a required rate of return (“RRR”) they wish to achieve on their investments. That being the minimum return that an investor expects to receive for taking on the risk of an equity investment.

· When the perceived risk of an investment increases, so does the RRR. This is usually expressed by increases in the equity risk premium, an observable value, which is the “extra” return an investor should receive from investing in risky stocks versus risk free bonds (usually long-term treasury bonds).

· Business Value can be expressed (simplified equation) as Earnings divided by the RRR. Therefore, as the RRR increases, valuation declines, all other things remaining equal.

So, has the equity risk premium increased during this Trade War period which began on April 2, 2025 (the date associated with the announcement of the first round of tariffs)? The answer is yes. On April 1, 2025, the measured Implied Equity Risk Premium was 4.57%. As of April 8, 2025, the measured Implied Equity Risk Premium was 5.14%[i] While we expect these values to fluctuate over time, this does mark a very significant increase during the period measured.

How Do Trade Wars Affect Private Companies Differently Than Publicly Traded Firms?

There are distinct differences in the way valuations are conducted for Private Companies versus Publicly Traded Firms. Most notably, equity in Publicly Traded Firms have the luxury of being traded in a public (liquid) marketplace where trades can be executed quickly and efficiently. This reduces transactional risk. Conversely, because equity trading for Private Companies is much less liquid, the strategy for acquiring equity in Private Companies is more likely to be for longer periods of time.

This being the case, Lack of Liquidity Discounts are commonly applied to Private Company equity transactions which further reduce the intrinsic value of Private Companies below what is otherwise afforded to comparable Publicly Traded firms. The Lack of Liquidity Discount has the effect of reducing transactional risk thereby further ensuring that the investor’s RRR can be achieved[ii].

As such, for Private Companies, reductions in valuations associated with tariffs are like a “double whammy” because not only do Private Companies have to contend with increases in an investor’s RRR, but they also are also likely to need to reduce valuations further for an investor and/or acquirer due to Lack of Liquidity Discounts.

Are these Declines in Valuation “Transitory” or “Sticky”?

That depends largely on the goals and objectives of the Trade War principles, specifically, the question is whether the current domestic administration is seeking free trade with other nations or simply trying to eliminate foreign trade deficits.

If the goal of the Tariffs is free trade, that being the elimination or reduction of tariffs amongst trading partners, then such policies are likely to be beneficial (over time) and therefore the current declines in valuation are more likely to be transitory because free trade policies tend to be less inflationary and can lead to economic growth and more robust employment.

On the other hand, if the goals of Tariffs are to eliminate trade deficits with foreign countries, then the declines in valuation we are currently experiencing are more likely to be sticky (meaning durable) because such policies do not necessarily lead to the elimination or reduction of tariffs and, accordingly, tend to be inflationary and can lead to higher rates of unemployment[iii].

Final Thoughts

Any meaningful discussion of free trade versus the elimination of trade deficits (which is essentially a protectionist policy) necessitates a basic understanding of the economic principle known as the Comparative Advantage of Nations[iv] which explains how countries can benefit from specializing in the production of goods and services where they have the lowest opportunity cost. In simple terms, for example, the principle of the Comparative Advantage of Nations begs the question of whether in today’s world the United States should be manufacturing simple, non-technical products, that can more easily and affordably be produced in a foreign country with a lower cost of labor. Another example would be where certain countries have access to rare earth minerals which cannot be mined in the United States. Free trade in both these examples benefits all parties which would otherwise be inflationary should free trade not exist.

That said, we cannot overlook the fact that there are those who see the elimination of trade deficits as being of strategic importance to the United States. We chose not to argue the merits of this perspective but rather to simply point out that there are trade-offs whichever path you choose, that being a reduced cost of living and higher employment with perhaps less strategic security under a free trade policy or increased inflation and unemployment with increased strategic security under a protectionist policy.

Paul B. Finch, MBA, is co-founder and Executive Director of Benchmark Solutions, Inc. and is an accomplished Strategic Financial Advisor. Professionally, Paul has focused his career on the various facets of corporate finance that revolve around the creation and measurement of equity value for his clients. Paul’s work includes both domestic and international merger and acquisition engagements as well as projects specifically designed for the purpose of increasing profitability, earnings quality, and growth prospects (while limiting risks and exposures) for his clients. Paul is a recognized subject matter expert in Financial Planning & Analysis, Capital Acquisition, and Business Valuation as well as Merger and Acquisition Advisory and has published many articles pertaining to these topics. You can contact Paul at paul.finch@benchmarksolutions.us.com

Susan Finch, MS, MBA, is co-founder and Executive Director of Benchmark Solutions, Inc. and is an Economist. Susan has focused her career on the various facets of corporate finance that revolve around historical, current and predictive views of business operations for clients in order to assess potential returns on investment in Merger and Acquisition transactions as well as for Strategic Financial Planning. As an economist, Susan has expertise in Financial Analysis, Financial and Economic Modeling, Financial Planning and Financial Decision Making. Susan also has considerable experience in Econometrics for the purpose of understanding forward-looking estimates of economic growth, demand, and inflation and their potential impact on earnings quality. You can contact Susan at susan.finch@benchmarksolutions.us.com

Benchmark Solutions, Inc. is a boutique business advisory that provides Financial Planning and Analysis, Business Valuation, Capital Acquisition, and Merger and Acquisition Advisory services to some of the most innovative, creative, existing and emerging companies in the agriculture, beverage, healthcare, and hospitality industries.

[i] Damodaran: https://pages.stern.nyu.edu/adamodar/

[ii] Accounting Insights, January 10, 2025: https://accountinginsights.org/liquidity-discounts-in-valuation-impact-on-deals-and-investments/

[iii] Fed Governor Christopher J. Waller, April 14, 2025: Speech by Governor Waller on the economic outlook - Federal Reserve Board

[iv] Developed by Classical Economist David Ricardo in 1817