Recoverable tariffs are creating new valuation, diligence and negotiation challenges in M&A transactions — and companies that fail to assess potential refund exposure may misstate earnings, working capital and deal economics. Recent court decisions invalidating certain tariffs imposed under the International Emergency Economic Powers Act (IEEPA) have fundamentally altered how tariffs may be evaluated in transactions. What was once treated as a permanent operating cost may now represent a recoverable asset; requiring buyers, sellers and diligence teams to reassess normalized earnings, working capital and contingent asset exposure. 

THE SUDDEN SHIFT WITH TARIFFS

For years, tariffs were treated as permanent landed-cost increases, but recent court rulings invalidating IEEPA-based tariffs created a pathway for refunds. U.S. Customs and Border Protection’s (CBP) new Consolidated Administration and Processing of Entries (CAPE) refund system allows importers to seek recovery of previously paid duties. In an M&A transaction, buyers and sellers are now considering:

• If a tariff refund is an asset
• If a refund is a contingent receivable or a litigation risk
• How to value earnings that include refundable and potentially refundable tariffs

WHY THIS MATTERS FOR FINANCIAL DUE DILIGENCE

Tariff refunds create a new lens for normalized earnings and a new class of diligence-sensitive assets and liabilities (for the latest on tariff updates across sectors, refer to GHJ’s Tariff Resource Hub). When IEEPA-based tariffs were first imposed, M&A markets generally treated them as permanent cost increases. Sometimes they were partially offset through pricing actions, but often they resulted in margin compression. Now that those tariffs have at least in part been deemed invalid, a number of new diligence and valuation questions arise for business owners and their advisors:

• The amount of IEEPA tariffs incurred
• The likelihood and timing of potential refunds
• The treatment of tariffs not yet eligible for recovery
• Whether upstream tariff impacts may unwind over time
• How tariffs should factor into normalized earnings and valuation analyses

The impact will depend heavily on case-specific facts, including the industry involved, the company’s ability to quantify tariff exposure and the degree to which advisors can support competing valuation positions.

Accounting treatment may also prove complex. If tariff refunds are treated as contingent gains, they are subject to recognition and disclosure limitations under applicable accounting standards. This could potentially create differences in management-adjusted earnings presentations and audited financial statements. Legal questions surrounding ownership of refund claims, indemnification exposure and the timing of recovery also remain unsettled. Because judicial and administrative guidance continues to develop, companies should carefully assess how potential refunds may affect transaction economics and financial reporting.

At a minimum, approved or highly probable refunds may support EBITDA and working capital normalization adjustments. Whether broader categories of disputed or potentially recoverable tariffs should also be excluded from normalized earnings remains far more contentious. Similar questions may come up in determining normalized working capital, especially when refund claims are pending but not yet realized at the transaction date.

BUYER VS. SELLER PERSPECTIVES

Buyers will likely focus only on realized or highly probable refunds, while treating unresolved claims as contingent and potentially discounting them entirely. Sellers, by contrast, may argue that all IEEPA tariffs were economically distortive and therefore should be removed from reported EBITDA, regardless of whether refunds have formally been approved.

As always, the outcome will depend upon a negotiated agreement between the buyer and seller and the appetite of both sides to get a deal done. Further, the strategic rationale for the transaction may influence how heavily either party focuses on tariff exposure. 

For example, a strategic buyer concentrating on acquiring channels, customers or product capabilities may place less emphasis on tariff normalization than a financial sponsor focused primarily on return on invested capital.

Buyers may also seek purchase agreement protections, including specific indemnities or contingent value mechanisms, to address uncertainty surrounding unresolved refund claims.

Additional commercial considerations may also arise depending on the company’s contractual arrangements. For example, companies that apply fixed markups to costs or contractually pass tariffs through to customers, may also face questions regarding refund sharing or future pricing adjustments.

THERE IS NO UNIVERSAL ANSWER

All of these factors need to be considered on a case-by-case basis and require thoughtful analysis to understand the dynamics of the situation. As refund regimes continue to shift, tariff exposure is increasingly a core financial diligence issue rather than merely a trade compliance matter.

Tariff refunds and associated payments bring a new level of complexity to M&A activity — a level that must be looked at from a strategic lens. As tariff refund exposure becomes increasingly intertwined with valuation, Quality of Earnings analyses and purchase agreement negotiations, companies may benefit from involving transaction advisors like those at GHJ early in the diligence process to evaluate potential financial statement and deal impacts.

At GHJ, its dedicated team of Transaction Advisory Services professionals works across buy- and sell-side deals to address challenges and drive successful outcomes.