Tariffs and current trading: stress-testing run-rate EBITDA in distribution

After April's US tariff announcements, a run-rate EBITDA built on FY24 no longer holds for distributors exposed to US trade. How we re-underwrite current trading between LOI and signing.

Six weeks ago most of the distribution processes we work on had a quality of earnings anchored on FY24 and a run-rate built on the last twelve months to February or March. For any target that imports into the United States, or sells into it from Europe, that work is now out of date. It is not wrong. It describes a cost base that no longer exists.

This note covers what has changed and how we re-underwrite current trading in the weeks between LOI and signing.

Where the rates stand on 13 May

The rates have moved several times since early April. The current position is:

• Baseline. Executive Order 14257 of 2 April put a 10% additional duty on almost all US imports from 5 April, with higher country rates from 9 April (20% for the EU, 24% for Japan, 46% for Vietnam). On 9 April the country rates were suspended for 90 days, so everyone except China pays 10% until early July. Canada and Mexico sit under a separate regime.
• China. After the April escalation, Chinese goods carried 145% of additional duty (125% reciprocal plus 20% under the fentanyl orders). Yesterday's Geneva joint statement cuts this to 30% from 14 May, for an initial 90 days. China takes its own duty on US goods down to 10%. Section 301 duties stay in place on top.
• Sector tariffs. 25% on steel and aluminium since 12 March and 25% on cars since 3 April. These are separate from the reciprocal rates and are not covered by the pause.
• De minimis. Duty-free treatment of low-value parcels from China and Hong Kong ended on 2 May.
• EU response. Brussels suspended its first countermeasures on 14 April and on 8 May opened a consultation on a further list covering about €95bn of US imports. The UK agreement announced on 8 May leaves the 10% baseline in place.

So a buyer signing in June is pricing a business whose cost base may change again in July (end of the pause) and in August (end of the China window). That is the problem current trading has to solve.

Why the annual margin hides it

Most QoE reports show gross margin by year and by business line. In a tariff shock that hides almost everything. Three effects run at different speeds.

Purchase cost. Duty is part of the cost of inventory under IAS 2.11. It reaches the P&L only when the goods are sold. A distributor with 100 days of stock, valued at weighted average cost, will show April and May margins that mostly reflect stock bought before 5 April.

Selling prices. Price increases, on the other hand, can go out the week they are announced. Many of the distributors we have seen sent price letters in mid-April. The result is a temporary margin uplift in April and May, before the duty-bearing stock comes through the P&L. If the vendor shows April as "trading ahead of budget", this is often why.

Volume. Customers bought ahead in Q1 to beat the tariffs, and some are now running down their own stock. Q1 revenue is flattered and Q2 order intake may be soft for reasons that have nothing to do with market share.

None of this shows up in an LTM figure. It does show up in a monthly bridge.

What we ask for and what we build

On the processes we have reopened since April, the request list has the same core:

1. Monthly gross margin by sourcing country, for at least the last 18 months, split by product family. Purchases by country of origin, not by supplier location: a German supplier shipping Chinese-made goods is a China exposure.
2. Inventory roll-forward by month, with the duty paid on each receipt and the stock on hand at 5 April, 9 April and today. This tells us when the duty reaches the P&L.
3. Price letters and the customer response. The list of increases announced, the date, the customers who accepted, and the credit notes or rebates granted since. Pass-through is measured on invoices, not on the price list.
4. Order book and order intake by week since March, against the same weeks of 2024.
5. Customs data: entries, HS codes, declared origin and values. On FR/US targets, we also look at whether the business is relying on first-sale valuation or origin claims that customs may challenge.

From this we rebuild run-rate EBITDA on the current cost base, rather than adjusting FY24 with a single percentage.

A worked example

Take the US subsidiary of a French distributor of professional kitchen equipment, which makes up most of the group's EBITDA. FY24 revenue is $80m, gross margin 30%, EBITDA $8m. Of the $56m of cost of sales, 20% is sourced from China, 35% from the EU and the rest locally.

At today's rates, before any price action, the extra duty on a full year of purchases is about $5.3m: $3.4m on Chinese goods at 30% and $2.0m on EU goods at 10%. Our estimate of the customs value is close to landed cost here, so we have not refined it.

The 60% pass-through is what the price letters and invoices actually support on this target. The vendor's model assumes full pass-through. The gap between the two is the discussion. And in the April and May management accounts, this business shows EBITDA above budget, for the reasons above.

The last line is not a forecast. It shows how sensitive the business is to a date the parties do not control, and it is what the lenders will run.

For the French parent, the US profit also arrives in euros. EUR/USD moved from about 1.08 at the start of April to above 1.14 on 11 April. On the same dollar EBITDA, that is about 5% less in euros.

The net working capital peg

One knock-on effect is easy to miss. Inventory now carries duty, so its book value per unit is higher. A peg set on a twelve-month average will be below the inventory at completion, and the seller is paid for that difference euro for euro. We set the target on the post-tariff cost base, or exclude the duty element from the peg and treat it separately.

Protecting the price in the SPA

Most of the deals we see have three tools. None is perfect.

• A longer current-trading window. Push signing back, or make the price conditional on May and June management accounts, once duty-bearing stock has reached the P&L. The cost is time and deal risk.
• The MAC clause. Most MAC clauses exclude general economic and trade conditions unless the target is affected disproportionately compared with its sector. Few buyers will rely on one. Law firms report W&I underwriters are now discussing specific tariff exclusions.
• The locked-box date. A locked box at 31 December 2024 transfers the April shock to the buyer with no adjustment. A more recent locked-box date, or completion accounts for this period, puts the post-tariff trading inside the price mechanism.

A few buyers are also using deferred consideration tied to H2 gross margin, or specific indemnities for duty owed on pre-completion entries.

What to do now

• Rebuild run-rate EBITDA from monthly margin by sourcing country. Do not apply a percentage to FY24.
• Treat April and May margins as a timing effect until the inventory roll-forward shows duty-bearing stock in cost of sales.
• Measure pass-through on invoices and credit notes, not price lists.
• Run at least three tariff scenarios with dates: today, end of the 90-day pause, end of the China window. Share them with the lenders early.
• Reset the NWC peg on the post-tariff cost base.
• If signing cannot wait, move the locked-box date forward or move to completion accounts.

This note is general information, not advice on a specific transaction.