The easiest issues can be the most difficult when you sell a business. If you own a business with
inventory, it seems obvious that the value of the inventory is in addition to the value of the
business. So if you have a business worth a million dollars, and you have inventory worth a
million, the buyer should pay you two million, right? (assuming no debt, or any other factors).
But is that always the case? What if you had the same business, but you happen to have ten
million in inventory? Is the business (including inventory) now worth eleven million? Pushed to
an extreme, it seems obvious that we need to start thinking about a “reasonable” amount of
inventory. But how do we determine what is reasonable?
When we value a business, we research industry benchmarks. What is the norm in this
industry? It is typically expressed in “number of days sales,” that is, how many days of sales of
inventory do you have on hand? 30 days? 90 days? Some people (especially at the retail level)
think in terms of “turns” which is just the reciprocal – 90 days of inventory means the business
“turns” its inventory 4 times per year (365/90=4).
So does that mean a “reasonable” amount of inventory is always included in the price? Not
necessarily. To avoid confusion, it is best to be upfront how much inventory is included (if any)
and how much extra the inventory will cost. When you are preparing to sell your business,
make sure you understand how the buyer will see the inventory – and how the deal will be
structured.
Need more information? Call us at 204-478-7266, ext. 110. or click
https://www.bealbusinessbrokers.ca/selling-your-business/ to download our free e-book on
selling a business.