Valuation of Distribution business with significant inventory

by a searcher from Carnegie Mellon University - Tepper School of Business

4 years ago

I am looking at a reseller/distribution business  with substantial inventory size. They keep high inventory to reduce the fulfillment time drastically(and increase margin) of special electronic components. Some of the inventory is multi year old and at times they make a great profit out of it due to its demand. Currently their inventory size is equivalent to 1 year COGS and a portion of that is possibly aged/non-selling. Unless you are into the business it's hard to know the real demand/value of that inventory. I am wondering if anyone here has any experience in valuing such business and structuring a creative deal to ensure you are not stuck with non selling inventory.

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searcher from The Ohio State University - Max M. Fisher College of Business

I would recommend divying up the inventory, here me out.

Anything above 1-3 months of inventory is excess. Yes there are deals you can get for buying in bulk and yes there are so many reasons a seller will tell you that it's essential to carry high inventory, but the reality is much of it will go unused.

Buy 1-3 months of inventory and let them know you will buy only the 'non-obsolete' inventory as you sell off the initial amount you purchased.

Lets say inventory level is $1M and COGS is also $1M for the year. It only takes 83K in inventory month to month to run this business. Maybe you buy 2-3 months upfront to allow a cushion, then you add in the note you will buy the remainder from the seller as you go.

The only way they will have an objection to this is if the inventory is obsolete. Add this to your contract and you are golden.

1 week ago | like reply | 0 likes

searcher from IESE Business School

Very helpful thread here - thank you all and ^Searchfunder member‌ for posting this question. I am looking at a similar company and the seller (via broker) has initially expressed that they want the inventory kept out of the deal - which I am grappling with as you need the inventory for the business to make sense at all, like ^Searchfunder member‌ quoted above, "one does not exist without the other".

2 years ago | like reply | 0 likes

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