How do you treat inventory & AR related to multiple & PP?

March 14, 2024

by a searcher from INSEAD in Calgary, AB, Canada

HI, Looking for some feedback on my thinking and also open to ideas on structure plz
I am considering a business in wholesale distribution

Rev: $1.4. /EBITDA: $300k /Cash, AR & Inventory: $500k /AP: $15k No debt
Equipment & racking etc :$100k

The seller is asking $1.5m all in.

What is the multiple?
$1.5m-$500k= $1m / $300k = 3.3x
or
$1.5m/$300k= 5x?

How is inventory usually treated related to the purchase price? How does WC usually work in a scenario like this?
Thank you

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

Great questions. The business is usually valued based on adjusted EBITDA. If you are paying full market price for the business, you should be getting normalized working capital with the acquisition, which would include inventory and A/R sufficient to operate. You cannot factor the A/R and inventory in the deal separately because you are likely to have a purchase price that will not be supported by cash flow. Now if the seller is willing to give you the business for a discounted price, then you might be expected to bring your own working capital to the table. But with $300,000 in EBITDA there is not enough cash flow to support both.

Happy to have a discussion and help you analyze the opportunity from a financing perspective. We do not charge anything for that service. You can reach me here or directly at redacted Good luck!

Reply by a professional
from Philadelphia University in Toms River, NJ, USA

So as Brad has mentioned, the business is typically valued using a multiple of adjusted EBITDA. Working capital is not a direct add or subtract from the PP, but rather you set a peg for a normalized level and adjust the PP at closing for the working capital that is delivered above or below that peg.

Would be my pleasure to have a intro call and discussion to answer any questions you may have, free of charge. My email is redacted

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