Businesses with a long tenure in the marketplace commonly have surplus inventory over and above what is required to run the business. This can be especially true for distributors or retailers whose inventory is their number one asset. Surplus inventory really only becomes a problem when a business owner wants to sell the business.
A Broker’s Opinion of the Most Probable Selling Price provides the owner with an estimate of the selling price of their business. The multiples and ratios used to calculate this price are typically derived from Merger and Acquisition databases that compile sales data from private company transactions. These database figures do include normal levels of inventory required to run the business, much like buying a car and expecting gas in the tank. However, when there is surplus inventory, it can distort the selling price and raise it to an unacceptable level for both buyers and lenders.
Excess inventory is a limitation in the eyes of a lender and a savvy buyer. Lenders have debt servicing ratios that they are bound by and they will often pass on opportunities that disregard these thresholds. Consequently, adding the extra inventory to the selling price and expecting a buyer to pay for it is not a viable option to a successful business sale.
The most viable way to sell a business with excess inventory is to offer the business to the market with the proper inventory levels and dispose of the excess. The seller can actively reduce the inventory levels while the business is being marketed through normal sales or vendor returns. Obsolete or unsalable inventory should also be disposed of as a buyer will naturally reject this inventory as part of the deal. If there continues to be excess inventory at the time of closing, there are some options for both the buyer and the seller. These options include offering incentives or liquidating the inventory through other means.
There are many creative ways to deal with excessive inventory when selling a business, but simply expecting the buyer to buy it, is not the best way.