Handling of inventory question

May 10, 2025

by a searcher from Purdue University in Chicago, IL, USA

I am putting together an LOI for a business in the heavy truck industry. They sell, b2b and b2c, heavy truck accessories, parts and tools/eqiupment. Also, manufacture a few pieces. They do not keep a large amount of inventory, but there is some. What is the best way to handle including inventory purchase in the LOI if I am not sure of the actual cost of inventory, but expect to figure that out during due diligence?

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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

I have seen many businesses with poor or no inventory record, even at the end of the year. There are two issues, counting and costing. Solution to buying such businesses is unique to each situation. Few years ago, I sold a machine mfg. business (P=$1 M) that had not counted inventory for 10 years. Buyer (sales $200+ M) had to have audited financials. I proposed one solution at LOI that avoided inventory counting and costing, and it allowed seller to run the business in normal manner. And then, 3 days before the Closing, buyer's parent in UK threw a monkey wrench. I proposed another solution that saved taxes to seller and created income to buyer. There are options to avoid putting $ value in LOI, or even in APA. FYI, I teach WC and have bailed out many broken deals represented by brokers and I-bankers. Happy to talk.

Reply by a searcher
from Massachusetts Institute of Technology in Los Angeles, CA, USA

Say that exactly. "The LOI is based on an enterprise value of XX, which includes inventory valued at YY. As part of our due diligence process, we will work towards establishing a fair cost basis for the inventory. All inventory above YY will be purchased via a seller note or transferred to the buyer on a consignment basis, and is not to be considered as part of this LOI"....something to that affect.

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