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

by a searcher from University of Nevada - Las Vegas

1 year ago

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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searcher from University of Tromsø

Calculating enterprise value is not a science. It is only done for comparison. Find a few other companies (that sold) and look at how the inventory affected the sales price. I would not pay for excess inventory unless it comes at a big discount. In my experience, many sellers and brokers base their expected sales price on a multiple of EBITDA + the inventory. EPV = AX + B. What the seller wants does not mean anything; the market decides where the lines cross.

3 months ago | like reply | 0 likes

intermediary from Wake Forest University - Schools of Business

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).

1 year ago | like reply | 1 like

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