Accounting for inventory in a distribution business?

June 30, 2025

by a searcher from The University of Michigan - Stephen M. Ross School of Business in Detroit, MI, USA

I come across many distribution businesses which have an asking price that adds the inventory on top of say a 4X EBITDA multiple. You don't have visibility to the quality of inventory; do you offer the 4X price and offer to take the inventory as a consignment in your LOI and how do you frame it in the LOI ? What other mechanism can be used to protect against downside with potential "stale" inventory?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

To answer your question, I have had a lot of clients experience sellers that insist on valuing the inventory and business separately. My recommendation to clients is that if they are getting the business at a fair multiple and are buying the inventory separately, and combined are at a reasonable multiple, then it makes sense. However, you cannot pay the maximum market multiple for the business and then also buy the inventory separately, because then you are overpaying for the business. You should be getting a business that you can step into and operate with the current assets in place if you are paying full price for that business. You need to figure out how much working capital the business requires and inventory should be one of the adjustments that plays into the working capital leftover in the business. If you are paying full price for the business you should have working capital (A/R, Inventory, and cash left over in the business) to cover normal operations for at least one cycle of cash turn (usually 30 days for most businesses). Sometimes a company may have excess inventory above and beyond what is required for normal working capital or business operations. When this is the case, you first want to check to be sure none of the inventory is stale. If it is stale inventory that is unlikely to sell, then you probably do not want to buy it because it will weigh you down. Secondly, you want to do an audit of the inventory prior to closing and verify what is in place and that it is being valued correctly. You do not want to overpay for inventory. This is especially important if you are buying inventory whose value may fluctuate based on market conditions. Third, if you are buying all of the inventory, you might consider buying it at a discount, to take into account the risk of stale inventory. Lastly, you do not have to buy all of the inventory at time of closing. You could have the seller hold some of the inventory post close and you can have a consignment agreement and pay the seller over time for the inventory as you sell it. That way you are protected from sitting on a bunch of inventory that might burden you from a cash flow perspective, but you still have access to move inventory if you get a sale (maybe for an item that is rare to sell). Most sellers will not have a lot of other options for selling the inventory (or they would have already done so) and would rather get something for it then nothing. If you have additional questions you can reach me here or directly at redacted

Reply by a searcher
from The Ohio State University in Columbus, OH, USA

Thanks for the tag, Luke. Brad has nailed it above. I like to cover working capital requirements then structure to pay down as you sell it. You are in the drivers seat, if they could sell it at market price they would have already done so. Working capital requirements should come w the business and anything excess I'd work to negotiate a discounted rate.

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