Is Your Inventory Holding Back Your Business Sale?

Hey, it’s David

I wanted to start this post with an analogy…

Ever notice how some planes just sit on the tarmac, not going anywhere? They’re shiny, expensive, and full of potential… but they’re not generating value if they’re not in the air.

That’s exactly what came to mind during a recent conversation with a Seller whose business found itself in a unique (and challenging) situation.

His company operates a trading business, sourcing a specific type of product from suppliers worldwide, repackaging it, and selling to retail customers. On the surface, it’s a straightforward operation.

But here’s where it gets tricky:

Over the last few years, the business aggressively purchased inventory at a rate far beyond what it could sell. At first, it didn’t seem like a problem… after all, the market was growing, and having extra inventory was seen as a cushion for future demand.

But then sales began to slow. Suddenly, the company was sitting on six to seven years’ worth of inventory. To make matters worse, the value of that inventory began to decline.

The Consequences:

This wasn’t just a logistical issue, it became a working capital problem.

The company’s books showed a mountain of inventory, which made its working capital requirements look abnormally high. For anyone thinking about selling a business, this is a red flag that could scare off Buyers or significantly impact the deal.

3 Ways Inventory Impacts the Sale of a Business:

1. Valuation
   Inventory is a key driver of a business’s value. While higher inventory levels can boost valuation, they can also create complications if they’re excessive or inaccurately accounted for. Buyers need to see optimal inventory levels and clean accounting during the sale process.

2. Cash Flow
   Inventory directly ties up cash. Excess inventory restricts cash that could be used for debt repayment or investments, while insufficient inventory leads to missed sales opportunities and higher shipping costs. Maintaining balance is essential for healthy cash flow.

3. Risk
   For Buyers, inventory is inherently risky. Outdated, slow-moving, or excessive inventory may come with hidden costs and challenges, such as obsolescence, spoilage, or theft. These risks can harm profitability and drag down the overall sale price.

Final Thoughts

Inventory can feel like a safety net, but when it’s mismanaged, it becomes an anchor. Whether you’re a Seller preparing for a sale or a Buyer evaluating a potential acquisition, it’s critical to analyze how inventory impacts valuation, cash flow, and risk.

So, keep the planes in the air, not sitting in the hangar.

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Thank you!

David