Selling a Business, Is the Inventory a Deal Killer

When selling a business that involves a significant amount of inventory, there are steps that can be taken to make the business easier to sell.

What are some of the common issues that inventory creates that can be impediments to successfully closing a sale to a buyer?

• Too much inventory
  • Too much inventory can cause the asset value of the business to exceed the market value of the business.  Valuing the business too high causes the return on investment to be too low to attract buyers, as they are better off investing their money elsewhere.
    • Let’s consider an example here of two separate business that are distributors of Bathroom Hardware.   Both businesses have an average annual EBTIDA of $400,000, and are asking $1,000,000 PLUS Inventory on top of that.   One business keeps an average $400,000 of inventory on hand while the other keeps $800,000 on hand.  The theoretical return on investment for the business with $400,000 inventory on hand is almost 29%, while it is just 22% for the business with $800,000 inventory on hand.  In which would you commit your capital if you were a buyer?
  • Requires additional space to store.  If the extra inventory was removed, the additional space required could be subleased, or the business could be downsized to a smaller space that costs less in rent expense.  Not to mention the productivity gains from the reduction in clutter and boost in worker morale from having a more streamlined warehouse.  These last two points are intangibles that can lead to immeasurable improvements in the bottom line of the business, by an increase in worker productivity and reduction in employee turnover.

[youtube width=”720″ height=”483″]http://www.youtube.com/watch?v=U38b8vDahrs[/youtube]

• Slow Turning Inventory
  • Outdated inventory that is not being sold to customers at a fast enough pace is a money pit.  The last thing buyers want to do is sink money into dead inventory.  The name of the game is to get a return on capital invested, and this is best accomplished with quickly turning inventory.  Solve this problem by liquidating your outdated and slow moving  inventory.  This also frees up space for the business to utilize better.

• Outdated pricing from manufacturers and other vendors
  • Make sure to know the market prices for the commodities used by your manufacturing suppliers.  When commodity prices go down, make to sure to renegotiate prices.   Janitorial Supplies are a good example, as petroleum prices are a key factor in manufacturing costs of many supplies.

For More information on how Just Elementary, Inc, Commercial brokers can help you with structuring your business to maximize sale value, contact our Client Care Manager, Sonia Chhabra, (323) 213-9193 or email cs@justelementary.com