Seeking help with S-Corp who buys too much inventory

November 24, 2018

by a searcher from University of Miami in Dallas, TX, USA

Does anyone have any experience valuing a manufacturing S-Corp, who routinely buys too much inventory? Rental company which has recurring revenue of $10M+ but has $18M+ in inventory.

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Reply by a searcher
from IE Business School in Arusha, Tanzania

Hi Paul, did you ask the owner why they purchase so much inventories? They could have a reason to do so. What it is ? Seasonality of raw materials availability? rising cost of raw materials? I feel like if they have no logical reasons explaining that approach (It could be just an habit), then you might have an opportunity to improve the value of the business quickly, should you be able to improve the cash conversion cycle, by reducing those inventories. As suggested by Greg, a DCF could help you figure out the difference between the target company value at the current level of inventories and its value if it was having a more reasonable level of inventories. I would suggest also that you speak to other similar companies and try to figure out how they manage their inventories.

Reply by a professional
from Purdue University in Midlothian, VA, USA

At Cornerstone Valuation we often value smaller companies like the one you describe for M&A, partnership buy-ins/buy-outs, estate planning, etc. My partner and I both have experience managing as well as valuing companies in manufacturing, distribution and sales/rental space. At the end of the day, all valuation is going to come down to looking at the company's intrinsic value (i.e. discounted cash flows) and at relative valuation estimates (i.e. comparable firms and comparable transactions). The inventory issues (as well as other factors) will obviously impact those value estimates. I'd certainly be glad to kick it around with you.

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