This article is an apolitical discussion focused solely on practical business concerns. The goal is to help small business owners understand what tariffs are, how they can impact business operations, and what considerations should be made from a legal and operational perspective.
What Are Tariffs?
A tariff is a tax imposed by a government on imported goods. The rationale behind tariffs varies—it could be to protect domestic industries, retaliate against trade imbalances, or generate revenue—but the practical effect is usually the same: the cost of the imported goods goes up.
That increase in cost doesn’t happen in a vacuum. It filters through the supply chain. For small businesses that rely on imported goods—either directly or through their vendors—tariffs can raise costs, squeeze profit margins, and affect long-standing relationships and agreements.
How Tariffs Affect Business Operations
Let’s say your business sources key components or finished products from overseas—whether you’re a retailer, manufacturer, or distributor. A sudden increase in tariffs can lead to:
- Higher prices for supplies and inventory
- Unanticipated costs in fulfilling existing contracts
- Pressure to renegotiate pricing or delivery timelines
- Need to quickly reassess sourcing or supplier relationships
Some businesses, particularly retailers or resellers with minimum purchase requirements, have tried to get ahead of anticipated price hikes by pre-ordering goods. While this might seem like a savvy move, it can inadvertently conflict with existing contractual terms. For example, if your agreement includes quarterly minimum purchase obligations, loading up on inventory early might technically leave you short in subsequent quarters. It’s important to discuss this with your vendors and, where appropriate, amend your contract to acknowledge that the pre-order satisfies future purchase minimums. Conversely, a manufacturer or supplier business would have opposite concerns or goals.
Tariffs in M&A Transactions
In the context of a business sale or mergers and acquisitions (M&A) transaction, the existence or impact of tariffs may become a material fact—particularly if the business’s operations, margins, or vendor relationships are significantly affected.
Sellers in M&A deals are typically required to disclose all material facts that a reasonable buyer would want to know. If tariffs have disrupted your supply chain, increased your cost of goods sold, or required significant changes to vendor or customer agreements, these changes could affect a buyer’s valuation or risk assessment. Failing to disclose such impacts could expose a seller to claims of nondisclosure or breach of representations and warranties in the purchase agreement.
Any outside event, whether tariffs, a pandemic or natural disaster could affect a business. Some M&A deals incorporate “earn-outs”. An earn out is a deal structure where part of the purchase price is paid up-front, and the rest is paid later (or not paid) if the terms for the seller to receive the earn-out are not met. For example, if a seller wants $2 million for their business, but the buyer is only comfortable paying $1.5 million today, they might agree to pay the $1.5 million at closing and the other $500,000 over the next couple of years—but only if the business performs as expected.
For small business owners, it’s important to know:
- Earn-outs usually involve specific performance metrics, clearly spelled out in the purchase agreement.
- They can be affected by outside factors—like tariffs, supply chain issues, or broader market disruptions.
If you’re a seller, and your earn-out depends on future profits, unexpected cost increases from tariffs could reduce your payout.
A seller of a business that might be affected by the tariffs will want to carefully consider how tariffs can affect the profits and revenue. If there is an effect, it might impact the earn-out.
That’s why, when an earn-out is part of the deal, understanding how external forces like tariffs could impact future performance is more than just a financial question—it’s a legal one, too.
Contractual Protections: Review Your Terms
Small business owners should carefully review their contracts with customers and vendors to see how tariff-related issues are addressed—if at all. One important clause to review is the force majeure clause, which is designed to excuse performance under certain
extraordinary circumstances.
Traditionally, force majeure covers events like natural disasters, war, and government action. However, whether or not a tariff or trade restriction qualifies as a force majeure event depends entirely on the language of the clause. If a party wants to be able to rely on tariffs as a defense for non-performance (or prevent the other side from doing so), this should be clearly stated.
If you’re concerned that tariffs could delay or disrupt your ability to deliver goods or services, consider amending your force majeure clause to include trade restrictions or tariffs as a covered event.
On the other hand, if you don’t want tariffs to be used as an excuse for non-performance, you may need to tighten up your contract language to either exclude economic hardship caused by tariffs or to require prompt notice and mitigation efforts from the other party.
The key here is clarity and mutual understanding. Whether you’re drafting a new contract or reviewing an existing one, addressing tariffs explicitly can reduce future disputes and ensure smoother business operations.
Planning Ahead: Business Strategy Meets Legal Foresight
In times of uncertainty—like when tariffs are being announced, lifted, or restructured—some businesses may feel the need to pause performance, delay deliveries, or renegotiate terms. That’s understandable, but it needs to be approached strategically.
If your business is affected by a new or proposed tariff, open communication with customers and suppliers is crucial. In some cases, you may need to negotiate temporary changes to pricing, delivery timelines, or performance obligations to keep relationships intact and avoid breaching your contracts.
Moreover, if your force majeure clause is too vague, or your contracts don’t contemplate trade disruptions, the best time to address that isn’t in the middle of a crisis—it’s before.
Conclusion
Tariffs are just one of many external forces that can disrupt a small business—but their impact can be outsized if your contracts and operations aren’t built to withstand the uncertainty. From revisiting your force majeure clauses to ensuring proper disclosure in a sale, the key is to proactively assess your risk and plan ahead.
If you’re unsure how tariffs might impact your contracts or your business valuation in a potential sale, it’s a good idea to consult with an attorney who can help you navigate these issues and protect your business interests.