Deal Structure -- Inventory Negotiations -- eCommerce

searcher profile

May 06, 2020

by a searcher from University of Virginia-Darden - Darden School of Business in Denver, CO, USA

I am negotiating the purchase of an eCommerce retailer. The business is healthy through COVID, but holds a lot of inventory relative to the value of the business. It generates ~$225k but has inventory on hand of between $400-500k. The seller has been very reasonable throughout the process and recognizes the challenge the large inventory amount presents. As a result, he has offered to act as a '"supplier" of inventory to me. Essentially, he would maintain ownership of inventory I deem 'aged' or unnecessary and I would sell it for him on a consignment type of arrangement where he would only be paid if it sells. Does anyone have experience structuring this type of arrangement and would be willing to offer some guidance?

Also, is there a standard for how much inventory should be included in the purchase of the business much like working capital?

Thank you in advance for the help!

6
11
243
Replies
11
commentor profile
Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
I am an M&A Intermediary. I have closed few e-commerce businesses and have looked at many. Few of questions to consider are: 1) How much inventory does the business need? 2). What is the cash flow after funding inventory? 3) How much inventory is needed to grow ? Owner always answer that you can scale up with same inventory. 4) How much sale come from new SKUs? In e-commerce you wind up having to stock many SKUs and hold large inventory. Do they get obsolete or can you off-load excess purchases in unrelated market or unrelated channels at cost or near-cost? 5) How does one determine new product or SKUs? Is their minimum quantity to buy? 6) Does Seller have good records of inventory turnover?
In addition to above, accounting of inventory and its impact on profit is important.
commentor profile
Reply by a searcher
from Brigham Young University in Salt Lake City, UT, USA
I've done this 10+ times. Happy to connect. YOu've got the main pieces there iwth dead inventory and on consignment. True consignment is near impossible and typically a lot of risk for the seller. Questions around SKUs, slow moving products, expiration dates can make this tricky. Send me a DM and happy to help.
commentor profile
+9 more replies.
Join the discussion