What Assets are you selling when you sell your business – inventory

Small Business Inventory and Owner
Small Business Inventory and Owner

A business brokers take on pricing inventory when selling your business.

For some businesses, inventory is really the equivalent of cash.  For instance, most gas stations have three days of gasoline on hand.  Convenience stores often turn their inventory – shorthand for saying that they sell 100% of the value of the inventory kept in a store – once a week.  In these cases inventory is the same as cash and will often be paid for in addition to the purchase price.

On the other hand, a specialty retailer with deep selection such as a hobby shop may only turn inventory three times a year.  In that case the inventory will usually be included in the calculated price just like machinery and equipment.  Unfortunately, many of those specialty shop owners struggle to receive payment for inventory when they transfer because their discretionary earnings are not high enough to support buying the entire inventory.

Selling the Hobby Shop

Many specialty stores become known throughout the region based on their extensive inventory and knowledgeable staff.  This type of good-will takes years of hard work to develop.  Unfortunately many owners run these stores as much for love as for money. 

Typical is a hobby shop we helped to sell.  They had very good sales at $1,200,000 but, in order to create traffic they constantly discounted items, and spent $70,000 a year on direct mail advertising.  The Sellers Discretionary Earnings only totaled $70,000 ( not bad for a small retailer).  Like many small specialty shops they had well over $300,000 of inventory.  Unfortunately $100,000 of the inventory turned quickly and the rest tended to sit.   

Assuming a Buyer would take a $30,000 salary, that left $40,000 cash flow to pay for the business.  That supports an approximately $180,000 loan payable over seven years.  The Buyer was willing to put $50,000 down, which was more than required by SBA, totaling $230,000.  The Seller and Buyer agreed to defer settlement for three months while the Seller sold off the inventory not wanted by the Buyer.  This brought the conveyed inventory down to $250,000.  Another way this could have been handled was for the Seller to provide an inventory loan to be paid over six months or so as the excess inventory was sold. 

Unfortunately, when it comes time to sell a business with a very low inventory turn and a high total inventory, the earnings often are not enough to generate an acceptable return for any Buyer after paying for all the inventory.

Gregory R. Caruso, Esquire, CPA, CVA
Harvest Business Advisors
Business Brokers, Business Valuations, Business Transactions