How do you factor/value inventory in a transaction?

June 27, 2022

by a searcher in Loudon, NH, USA

Looking at a small e-comm web site that keeps inventory. Seller has given an estimated value of the inventory at cost ($300k) and given an asking price for the business with inventory ($750k). What's typical? Negotiate the value of the business separately first and then deal with inventory? Try to bundle it? I assume a seller should be able to provide a full accounting for all the inventory and what they paid. What about the age of some inventory? I'm sure that some turns over faster than other items. Do you discount the old stuff? I do not have experience with inventory management so how do you know if they have too much/not enough. I assume there is software that exists to help predict and manage inventory? Thanks in advance for any guidance on inventory 101!

Reply by a professional
from Bishop's University in Moncton, NB, Canada

Inventory is part of the working capital and enterprise values are inclusive of net normal position in working capital. So, it depends on the industry and how readily financeable this inventory is. As far as the value of the inventory itself, you need to have it examined and yes, old and dated stuff should be discounted. Others in this thread have addressed this point. Here's a video that addresses this: https://youtu.be/X6L_dS2gRYs

Reply by a professional
from Concordia College, Moorhead in Minneapolis, MN, USA

Imagine that the inventory is worth $0. This begs the question as to whether the business is worth $450k assuming you would have to replace all of the inventory. Is the business worth $450k? I'm guessing a bit of history would help you determine the value of the current inventory. Is this finished goods inventory or raw goods? Is it possible to return to original suppliers for future favorable terms? Are these common parts with value added before finishing?

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