Why 2025’s “Soft Landing” Was a Mathematical Illusion
For the past twelve months, a curious silence hung over the Canadian mid-market. Despite the headlines of 25% tariffs and the escalating rhetoric between Ottawa and Washington, many P&Ls looked surprisingly resilient. In 2025, the impact seemed muted.
But as we sit here in late January 2026, the silence has been broken. The “soft landing” of 2025 wasn’t a result of economic resilience; it was a result of
weighted average accounting and a massive, one-time inventory buffer.
We are now approaching the cliff.
1. The Anatomy of the Mirage
In late 2024, as tariff threats moved from promises to executive orders, many firms engaged in a massive “pull-forward” of inventory. They front-loaded warehouses with pre-tariff goods.
Throughout 2025, these companies were selling what I call
“Clear Water”—inventory purchased at 2024 prices. Because most businesses use weighted average costing, the high-tariff shipments arriving in early 2025 were blended with the cheap stock already in the warehouse. The “price at the pump” for the business rose by 3% or 5%, not 25%.
The result? A mathematical illusion of stability. But that “Clear Water” is now running dry.
2. Client Case Study: The Amazon US Arbitrage
One of my clients—a Canadian firm sourcing premium products from Europe for the
Amazon US market—provided a textbook example of this lag.
- The 2025 Shield: They moved six months of inventory into US warehouses before the Jan 2025 tariff implementation. On paper, their gross margins remained rock-solid for nearly a year.
- The Hidden Decay: By Q4 2025, they noticed sales volume dipping. Even though they hadn’t raised prices yet, the US consumer was already pulling back due to other rising costs.
- The 2026 Cliff: This month, their “Clear Water” stock ran out. New shipments are hitting the border with the full weight of the current 10%+ average tariff. To maintain their 2025 margins, they would need a 22% price hike. On Amazon, that is a death sentence for sales velocity.
3. Industry Example: The Precision Manufacturing Squeeze
Beyond individual clients, we see a broader, more systemic crisis in
Precision Manufacturing, particularly in Ontario’s aerospace and tech sectors.
Consider a typical high-spec manufacturer using specialized European steel and Chinese micro-components. Following the
January 16th Carney-China deal, the U.S. has signaled that “Rules of Origin” audits will be the new weapon of choice.
- The Input Trap: Even if only 5% of a machine’s value comes from a Chinese sensor, the entire unit can be flagged at the border for retaliatory duties.
- The “Muddy Water” Reality: These firms aren’t just facing a 25% tariff on raw materials; they are facing a potential 100% duty on the finished product if they fall into the “Drop Off Port” category.
- The Working Capital Wall: Unlike retail, these firms have long-term contracts. They are currently “paying for the privilege” of fulfilling orders at a loss, hoping for a diplomatic resolution that Davos proved is not coming.
4. The CFO’s Action Plan: Finding Your Cliff Date
If you are leading a business in 2026, you cannot rely on “Historical Averages.” You need a
Forward-Looking Tariff Audit.
- De-blend your COGS: Stop looking at weighted averages. What is the landed cost of the shipment arriving next week? That is your new reality.
- Stress-Test the LOC: If your inventory costs 25% more to land, you need 25% more room on your Line of Credit just to maintain current stock levels. Do you have the room?
- Calculate Volume Elasticity: At what price point does your US customer simply stop buying?
Conclusion
The “soft landing” was a mirage fueled by old inventory. In 2026, the water is muddy and the buffers are gone.
If your business valuation is still based on your “record-breaking” 2025, you are in for a shock. In my next article, we will explore
“Valuation in a Volatile Vacuum”—and why 2025 EBITDA is a ghost that will haunt your exit price.
About the Author
Sanjay Kulkarni, CPA, CFA, CBV, C.Dir With over 30 years of experience as a Chief Financial Officer, Sanjay helps $1M–$100M businesses navigate complex transitions. By combining deep technical valuation expertise with strategic business model innovation, he ensures that family legacies are protected from taxes and optimized for the future.
Ready to Act? For a 15 minute free consultation, Please email me at
sanjay@sankulinc.com or send me a message on LinkedIn.
Sankulinc.com businessvaluegrowth.com
© 2026 Sanjay Kulkarni, Sankul Enterprises Inc. All rights reserved.
For information purposes only.
