How do you value an asset heavy company?
February 25, 2025
by an member from University of Washington in Mount Vernon, WA, USA
Hello all,
We're currently trying to make an offer to a company with some cash flow ($895k), but a significant amount of assets ($4.5M inventory). We doubt the seller will ignore these assets and agree to a simple competitive multiple on the cash flow. The seller has not provided an asking price, so we're firing a bit blind here.
How should we approach these types of situations?
from Grand Valley State University in Detroit, MI, USA
2) Have you reviewed an inventory aging to identify how much of that might be slow-moving or obsolete?
3) If inventory really is that high, how are you thinking about the attractiveness of the business? What's the return on equity and free cash flow post-working capital investment as the business grows? Without the sales figure it's hard to say for sure, but you should consider why the business is so capital inefficient and if there are ways to modify that.
4) What's the offsetting A/P associated with the inventory? Better yet, what does the full working capital picture look like? I'd assume when you factor in the A/P that you are assuming as part of the deal, the net working capital figure likely falls below what a reasonable multiple for the business might be.
5) Depending on how all that shakes out refer to point 3. The ability to generate that cash flow (and thus achieve a purchase price you agree on) is dependent upon that inventory, so I'd be hesitant to carve that out or value the inventory separately on top of a multiple of cash flow. If the seller can liquidate the inventory for greater than you'd be willing to pay, perhaps they should do that, but once you factor in the overhead, selling costs, time, etc. associated with doing so, they are likely to net much less than they might believe.
A hard one to answer without more details, but hopefully that gives you some things to think about.
from The University of Chicago in Chicago, IL, USA
2) Actual vs Reported inventory is the #1 source of creating profit or losses. Examine changes in inventory vs sales. Actual profit may be less than $895 k if inventory is over-reported, or the reverse i.e. actual profit may be more if inventory is under-reported on tax return.
3) Often high inventory in the warehouse is associated with low inventory on tax returns. If so, seller will have huge tax burden on sale. If they have not thought through this, deal is at risk.
4) High inventory may have obsolete portion. This is bad or good. It is bad if the business truly needs such high inventory, you pay for it, and now you have to replenish it. It may be good if obsolete inventory was a mistake, is written off, you do not have to replenish it and you do not pay for it or pay on as-used basis.
5) Do you need to double inventory if you can double sales and profits? If YES, walk right away.
I can go on with more scenarios. I have done few such transactions.
Happy to help