Deal terms for consigning inventory vs buying it

July 24, 2024

by a searcher from Florida State University - College of Business in Birmingham, AL, USA

Need some advice on deal terms for a retail deal I am working on. The deal has three components, the cash flow value with a multiple, the real estate value and the inventory. The business is worth about $500k, the Real estate value is $750k and the inventory has a cost value of about 870k. I am working with a lender for a loan on the business value and the RE, but want to propose to the seller that I pay for the inventory as it is sold (consignment) vs buying outright as part of the loan package. Wanted to see if anyone has some deal terms similar to this that they would be open to sharing.

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

^redacted‌ thank you for the tag. Cosigning the inventory is not uncommon. Typically we see the inventory cosigned where it is paid for at cost typically once it is sold and within so many days of receipt of payment to the company on that inventory. Usually there is no requirement to purchase all of the inventory. Cosigning inventory is a great way to avoid paying for and getting stuck with out-dated inventory. Usually there is a date by which if inventory that is cosigned is not sold it can either be provided back to the seller, can be paid for at a discount, or in some cases kept by the buyer.

Please keep in mind, if you are paying market price for the business you still need to be sure you are getting adequate working capital with the company at time of sale. The inventory or a portion of it could be part of that working capital. If you do not have adequate working capital, you will not be able to buy more inventory until you sell your current inventory, and then you will only have the margin earned on that inventory to buy more inventory, which often will not cover replacing the inventory.

If you have additional questions or need any additional assistance from a financing perspective, please do not hesitate to reach out to me here or directly at redacted

Reply by a searcher
from Texas Tech University in Austin, TX, USA

RE can be separate as it usually does not contribute to the cash flow. In case inventory is pre-paid and held, then your LBO model will assume inventory to be part of working capital when you arrive at the valuation. Therefore, whatever multiple you come with includes reasonable working capital (which includes inventory). You want to ask the seller and get an idea on average inventory they maintain over a period of time (usually 12 months) and ideally expect that will be your inventory target that the seller must leave at close. If not, you must adjust the Purchase Price dollar for dollar.

As far as paying for inventory, yes you can ask for getting on consignment and paying as you go. Good if seller agrees. You may also want to keep an eye on dead or discounted inventory based on some criteria.

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