Seeking Advice on Structuring Deals with High Inventory Levels

November 06, 2024

by a searcher from University of Melbourne in Sydney NSW, Australia

Hi everyone,

We are currently looking at a deal in Australia on a specialised wholesaler distributor. It's a great business, but they hold far too much stock. The owner is very adamant that, despite some SKUs sitting there for 5+ years, it is all still 100% saleable. We’re all aligned that inventory terms will be a key part of this deal, and many of our advisors and network contacts agree that negotiating slow-moving SKUs on consignment would be the best approach.

We’d love to hear from anyone in the Searchfunder community with firsthand experience structuring deals that involved high inventory levels, particularly if you negotiated inventory on consignment.

Please feel free to reach out via email at redacted Thank you!

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Reply by a professional
from Bentley College in Miami, FL, USA

You've already mentioned consignment, which can be a great way to keep working capital requirements in check. You might structure this by categorizing SKUs based on turnover rates, placing slower-moving items on consignment terms. This can protect cash flow and motivate the seller to retain a stake in selling older stock. You could also consider a phased valuation of inventory, where the purchase price for certain SKUs adjusts if they remain unsold for an extended period post-acquisition. This mitigates the risk of inflated inventory value and aligns both parties on moving the stock. Another approach could be a post-closing inventory review, where the deal terms allow for price adjustments based on updated inventory valuations after a set period. This would account for any items the seller claims are "100% saleable" but remain unsold.

Reply by a professional
from Dartmouth College in Los Angeles, CA, USA

Very common negotiation point. Seller will always argue that it's good inventory, but obviously if it hasn't sold there is some issue. You can try and value the inventory using some sort of discounting or hire a third party, but this is often as much art as science when it comes to negotiating as part of a sale.(especially for smaller deals where parties want to keep deal costs in check). You have to come to an agreement on what % the seller gets credit for-- and it should be less than 100%. Then figure out if the agreed amount if part of closing working capital or is handled separately as a deferred payment or otherwise. Also VERY important to get a strong inventory rep in the purchase agreement to protect you if it turns out there was an undisclosed issue relating to the inventory.

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