Do I need to add the inventory value to get a proper valuation

May 13, 2022

by an intermediary from University of Nevada - Las Vegas in Henderson, NV, USA

Had a question on a valuation of a deal. If the company has let's say 100k in inventory, and the enterprise value is calculated using the revenue and adjusted EBITDA over 3 years. Is that inventory number already represented in the enterprise value with the p/l numbers through COGS or does that need to be added on top of the p/l numbers to get to the proper valuation of a company?

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Reply by an intermediary
from Arizona State University in Long Beach, CA, USA

Yes, inventory should be included for most businesses. For really small businesses, it's not uncommon to value inventory separately assuming the asking EBITDA multiple is reasonable and it still makes sense after adding inventory. There could be exceptions to this if there is excess inventory beyond what is normally required to sustain the business. Ex. If the owner bought an unusually large quantity recently to get a discount, or to mitigate some supply chain risks, etc.

You should review this during due diligence to ensure the inventory is marketable and not old, obsolete junk that has piled up.

Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA

It depends. It sounds like you are using a value based on Price/Revenue and Price/EBITDA multiples, presumably using comparable data from closed transactions. If this is the case, check your data source -- some explicitly exclude inventory in their calculation of Price (e.g., BizComps, in which you add the inventory to your product), some explicitly include "normal inventory" (e.g., PeerComps, in which case "normal" inventory is already included), and some you have to check the details of each transaction (e.g., Deal Stats).

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