Asset purchase and how to treat inventory

November 29, 2023
by a professional from New York University - Leonard N. Stern School of Business in New York, NY, USA
Looking at a business that has inventory which could be easily liquidated (e.g., lumber, plywood, etc.). Current owners have no revolvers or LOCs to fund inventory; they use the cash from the business. There is no other debt either. Structuring as an asset sale to do my best to separate from any historical exposures I know exist based on initial discussions with the seller. I'm valuing the business based on EBITDA and giving an extremely fair multiple; maybe even a bit on the high side. However, sellers think inventory should be added to Purchase Price. Curious to hear thoughts. Appreciate your perspectives.
from United States Naval Academy in Colleyville, TX 76034, USA
1. Determine the enterprise value as a going concern based on cash flow (sounds like you've already done this).
2. Determine what the normal working capital on the balance sheet should be in a going concern (the hard part). This should be part of the EV.
3. Adjust the price based on the level of working capital that is being transferred. If they have excess inventory, up the price to buy it. If it's below nominal, have them leave cash or discount the price to account for that.
from The University of Chicago in Chicago, IL, USA
A buyer should not be buying a business based solely, or primarily, on multiples; either you will overpay or loose a good opportunity.