Creative strategies to acquire companies with lots of inventory

July 01, 2019

by a searcher from University of Colorado at Boulder in New York, NY, USA

Hi everyone. I'm evaluating a potential target in the e-commerce space. The company has inventory on hand equal to the asking price of the company. Put another way, the company will cost 2x the asking price when inventory is included.

Building the additional debt load necessary to purchase the inventory into the model compresses the margins and hurts the cash on cash returns of the investment. Does anyone here have experience or tips on how to creatively structure the deal so that the inventory doesn't have such a material impact on the economics of the transaction? I'm basically looking for a way to build the inventory int0 the deal without taking on the full debt load for taking on the inventory on day one.

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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

Over the years I have run into many, if not most, e-commerce businesses with high inventory. Recently I worked on one with 10 figures. There are many issues that need to be understood ...What is the required inventory? How much is obsolete, slow, excess? Does seller have good systems and data to track? To analyze? Is it drivern by long lead times? MOQ? Price vs. Quantity? Seller sophistication? etc. The solution to your question depends on answers to these and many other questions.

Price should include WC, no ifs, no buts. Most e-commerce sellers/advisors want full price + inventory. Some stretch is ok, but do not fall for full P + Inv.. Many e-commerce businesses have high earnings and persistent negative cash flow, primarily due to inventory. Value depends on cash flow, not earnings.

At a high level, Amazon business model has no inventory, no receivables, and a float on A/P (beore their warehousing model of last few years. Even there, their A/P is long).

I teach WC and consult on it. Happy to help. No strings. redacted

Reply by a searcher
from University of Texas at Austin in Austin, TX, USA

Ryan, some level of inventory should be consider table stakes/working capital. Some amount of excess inventory beyond that is probably wise and should be added to the purchase price. Once you've cleared through those two groups you should work to ring fence the rest of the excess inventory and explain to the owner that purchasing the excess inventory is untenable based on inventory turnover, debt financing etc. Depending on the type of inventory (does it go bad, do new models/versions come out regularly or not) you may be able to write up a separate contract to procure the inventory from the seller at a discount to market price. For the owner, the inventory is a sunk cost that's been fed through the balance sheet (that will be cleared out once he sells, unless he has insanely favorable terms from his vendors) so this option will be favorable to him/her as a way of generating additional cash/income after the sale.

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