In some industries, it is common for the inventory to be carved out so that the asking price is x amount plus inventory. This happens more frequently in the retail sector, but it is not limited to those alone.
However, that thinking can present challenges to prospective business buyers because the business for sale market is steeped in legacy.
Rather, a buyer must thoroughly analyze the inventory from two aspects: First, is it good and resalable? Second, does the inclusion of it make sense with the overall valuation?
Regardless of how current the inventory may be, it is always worthwhile to try to negotiate terms on it. This can include paying for it as it sells, having the seller finance part or all, or, getting an overall discount on the complete package. For any items that cannot be readily sold then of course you will want these discounted. However, if the potentially obsolete or slower moving items represent a small percentage of the entire inventory, sometimes it is not worth the fight.
As it relates to the second point of valuations, there are a few things to consider. The seller has to turn over the business to a buyer with an optimal level of inventory to sustain the revenues. If not, then the valuation itself has to be modified. After all, a proper asking price reflects normalized activity in the business and so if they are not including inventory that will ensure the continuation of that activity, the valuation must be adjusted.
Just like a business where there are tangible assets like machinery and equipment which are included in the purchase, the same holds true for inventory.
Over the next five weeks I will be doing a webinar series sponsored by Guidant Financial Group covering: Buying a Business in The Current Market, Finding the Right Small Business, How to Accurately Value a Small Business, Small Business Financing Options, and Due Diligence When Buying a Business. If you would like to learn more click here:
Have a great week!
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