Ideally, you want to have as little inventory on hand as possible in your business. Afterall keeping a lot of inventory, ties down your money. Having to keep a large amount of inventory on hand means that your money is sitting idle and not making money for you.
Large Inventory costs also affects the value of the business. If in addition to the business, if they have to also buy a large amount of inventory, their return on investment becomes smaller and you have a smaller pool of buyer.
However, some businesses are unique and they need to keep a large inventory. For example, if your business is built on buying very old cars, restoring them, and selling them for a fat profit, you will try and buy old cars whenever they become available, restore these and then sell them for a fat profit. And you may have several years of inventory sitting with you.
However, a typical buyer who is looking for buying your business based on cash flow, will not only have to pay for the value of the business based on the cash flow, but also buy the inventory which may not generate profit for some time, but still needs the inventory to generate profits.
In such cases, one may have to come with some creative ideas.
We came across a similar situation where this Company services and sells refurbished equipment of a very specialized make that is currently not manufactured and the owner was contemplating selling his business. Based on current sales, the Company had 3-4 years of inventory in stock. One of the ideas that we suggested to them was that the they would create a supply / management agreement with the buyer where they would supply the refurbished equipment to the buyer over a period of time, and build in a profit component in it. It will be somewhat similar to seller’s note but with higher return as he is also providing some service. Otherwise the buyer would have to pay over $2 million more for inventory for a business that is generating about $500K of earnings, and would be a difficult proposition.
