Deal terms for consigning inventory vs buying it

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

1yr ago

Deal terms for consigning inventory vs buying it

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 searcher 1yr ago
from INSEAD in Calgary, AB, Canada

Great points here. My sense is don't feel like you need to buy 100% of the inventory. Target what you anticipate would take 3 months supply (adjust for industry lead time) and then offer to buy the balance at a pro rate discount. I use approx 1%-2% monthly holding cost in my rough calcs. Ideally only buy anything that is less than 12 months old. More than 12 months is effectively worth $0. Unless there is an industry reason and will sell, Hope this helps

reply by a searcher 1yr ago
from University of Michigan in Bay City, MI, USA

That level of inventory is going to be bad news one way or the other. If you really need $870k of inventory for a business that has an enterprise value of $500k, that's going to be a working capital nightmare. If the seller just has a bunch of unnecessary (and possibly unsalable) inventory, then good consignment terms that don't force you to buy anything you don't want should help.