I have completed five mfg deals with inventory. I have found the simplest way is to have a working capital peg number. Basically, we use AR + Inv - AP as the formula. If the avg value of this formula is $2MM the previous 12 months we then calculate that value at close and adjust the seller note portion up or down by that amount. Inventory is trickier than the AR portion. You do need to understand how the seller values their inventory in terms of how overhead, labor, and material is applied. Work in process will never be perfect....Its one of those things that will have to be close enough. I also always compare the inventory value to the expected sales price and make sure there is a suitable margin. My advice is not to make it too complicated

Hi Neil - I currently own a manufacturer and would be happy to help share some of my experience. Building on what you've heard above, I would advise you to review the inventory by product/part no. and compare it to sales and the age of the inventory. I would caution you not to consider aged or slow-moving/no-movement inventory as part of your working capital. You should negotiate with the seller as it some or all of it should be written off. It's worth reviewing your target's inventory control practices - how much inventory do they write off every year? How do they control the inventory? You'll want to make sure you are able to make adjustments to your purchase price if the reported inventory is not what is actually there. Feel free to reach out to me at: redacted