The European Union agreed to settle with the United States on a 15% tariff rate to prevent being subject to a 30% or higher rate. Although some categories of goods and services may be exempt or subject to a lower rate, the pharmaceutical industry anticipates its costs to rise by over $19 billion. While businesses are focused on the import and export rules, along with distribution and manufacturing channels, the underlying impact on the asset valuation and protection of founders and entrepreneurs among the most impacted industries including, pharmaceuticals, remains to be seen. Over 40% of international exports from Europe are targeted toward the U.S. market. The tariff can dynamically shift business operations and goals for small and medium sized businesses. Additionally, founders and entrepreneurs operating between the two jurisdictions may have to restructure their enterprises and asset holdings to prevent additional tax and tariff exposure.
Consider a small family-owned company operating in Germany exporting certain drugs in liaison with a sports and fitness company in the United States. With the increased tariff costs, the cost of purchasing the product for the U.S. company would increase significantly. Additionally, the German company, due to its small size and inability to absorb the increased cost may not be able to meet the prior demands or its contractual obligations. Both the U.S. and the German business owners would be impacted adversely. For founders and entrepreneurs, especially in the wellness, nutraceutical, or pharmaceutical industries, a key component of their value is in their intellectual property. Small companies are often structured for simplicity to minimize administrative burdens on management and compliance. More importantly, the value of the good subject to the tariff duty often includes intellectual property licensing fees which can greatly increase the cost.
Founders of small and mid-sized companies in the pharmaceutical industry may need to revisit restructuring their businesses to allow for more licensing and intellectual property access so that manufacturing for domestically distributed goods can be done locally to offset export duties. However, cross-border contractual agreements are not limited to ensuring that licensor and licensee meet the terms of the contact, but also can impact each business’ investments, growth, and exit opportunities. Additionally, if the intellectual property is not properly protected, or held within the company manufacturing the product, it may not be protected in the event of a lawsuit against the product manufacturer.
A sound structure even for a small business entails separating the intellectual property assets from the primary business activity and implementing a series of licensing and royalty agreements to manage the use of the intellectual property. Business valuations and assets included in a business transaction can be impacted by the structuring of the business. Additionally, segregating the intellectual property may offer tax advantages because it can be placed in more tax-favorable jurisdictions than the tax imposed on income generated by other assets and activities.
Overall, the tariff deal between Europe and the United States impacts consumers and business owners in both jurisdictions at multiple levels. Increased costs would shift to the consumers which may make some products unaffordable or inaccessible. The cost of manufacturing and distribution may be unsustainable especially for growing enterprises that are small or mid-sized in the pharmaceutical industries. Fulfillment orders between companies may be adversely impacted. Business owners, especially with multinational ties, can mitigate some of the burden of the tariffs and maximize their business opportunities by realigning and restructuring to optimize intellectual property access, use, and protection so that manufacturing and distribution in aligned with the consumer needs and location.