Working inflated inventory value into offer. Looking for solutions.

March 28, 2022

by a searcher from University of Pennsylvania - Philadelphia in Philadelphia, PA, USA

I am looking for guidance on structuring a commission on an elevated inventory level on a potential acquisition target.

I am currently working a deal that has a large amount of inventory. Currently, I am not certain what percentage of the inventory is useful and could be sold in the first 90 days. An inventory audit will be part of the diligence process, but I need to reach an agreement before.
Has anyone used a type of commission or another structure to not pay for the initial amount of inventory and pay the sellers once I sell the inventory post-acquisition?

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Reply by a professional
from Marquette University in Kirkland, WA, USA

You have multiple issues. The first two that come to mind are 1) how much of the inventory is usable and salable. This is important as you don't want what's been there for many years. You can take that off the deal and the seller can dispose of it, sell it to you, etc. (although you may not want him or her selling it on Ebay or other places that could compete with you). Determining this can be part of a QofE report or similar. 2) Look at how much inventory has been carried over the last few years. Some (savvy) owners have stocked up in advance given all the supply chain and shipping issues. If the normally carried $500K and it's now $1 million there's some adjustments to be made and it may be in your best interest to buy the excess if it was purchased at a price lower than the current market price.

Reply by a searcher
from Butler University in Indianapolis, IN, USA

I had two deals where we disagreed with the seller regarding slow moving inventory. In both cases we agreed to not value the inventory for our deal, but keep it on as consignment for a year. It was a tracking issue, but anything that sold from the list was then paid out to the seller. I think less than 10% of that inventory was sold. If the seller is confident the inventory is good they should agree to this structure. If they push back really hard they know it’s not good.

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