How do folks think about the value of inventory when making offers?

searcher profile

June 09, 2025

by a searcher from Boston University - Questrom School of Business in Newton, NH, USA

I'm relatively new to the ETA space, and am in the earlyish innings of my search, focused mainly on service industry targets. However, I came across a listing that looks interesting; current owner has similar background as me, runs the target similar to how I would, etc. But it's not a service company, and has significant inventory, which ebbs and flows over the course of the year. These numbers aren't the real ones, but are roughly proportional, to give you an idea of what I mean: SDE: 100K Asking Price: 267K Inventory: 533 (not included). Assuming that the valuation of inventory is accurate, I am basically buying the inventory, which you pretty much have to in order to run the business. So my question is, how do folks view / evaluate offers on inventory-heavy companies? It feels odd to pay for something that was *already* a business expense for the company under previous ownership. If you buy the inventory in the above example, that pushes the multiple to an eye-watering 8 handle. I assume there is some other way to look at this, since any company that has a high amount of inventory would be untouchable from a traditional price / SDE multiple. Thanks!
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commentor profile
Reply by a professional
from University of Central Florida in Chicago, IL, USA
With SDE that low and inventory not included, I would probably walk away. That's a very high multiple for what you'd essentially be doing - buying a job. The multiple should make sense after including the inventory in the price. Look for aged inventory - anything old or obsolete that isn't selling that should potentially be written off. Also, to clarify, the inventory is not a business expense (unless they're operating on a cash basis) until it is sold. If the inventory is on the balance sheet, it hasn't been expensed yet.
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Reply by a searcher
from Southern Methodist University in Dallas, TX, USA
Great points covered already - one additional financial metric is to look at GMROI which measures if the business generates enough gross margin to cover the additional cost in inventory - we are missing a few pieces of information to calculate but based on the above if you need to have $500k of inventory to generate $100k of profit it’s not a very scalable business.
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