How does inventory and backlog factor into valuation? - Searchfunder

Member resources:

Member directory

Searchfund list

Company contacts

Industry reports

Transaction multiples

Frequent asked questions:

What is Searchfunder.com?

Searchfunder.com is an online community of searchers, investors, lenders, brokers and other professionals. Over 80% of those involved in searchfunds maintain a Searchfunder account to help them network, hire, and mentor others.

What are the benefits of membership?

In addition to accessing the most active online network of business buyers, Searchfunder licenses research that is simply not cost effective for individuals. Access over 15,000 industry reports and 50,000 transaction financials. You also get monthly credits for contact information for your company sourcing campaign with the option to purchase more at drastically discounted rates. Searchfunder has pre-purchased access from these data providers in order to empower individual buyers and to help searchers level the playing field versus private equity.

Do you have deals?

While we are primarily a buy-side network, we do have hundreds of brokers that regularly post deals to the community.

Can I find an internship on Searchfunder?

Absolutely! We have the industry's largest intern job board. If you are considering a search, the first step is to help another business buyer so you can hit the ground running.

What does it cost?

Searchfunder is a subscription service. We offer flexible monthly, annual and lifetime memberships.

Monthly

$79 / month

Annual

$19 / month

Lifetime

$432 / once

Those who maintain an account with us for over 4 continuous years are permanently added to the community without the need for a membership.

Do I need an MBA to join?

While a large number of our members come from dedicated programs at Harvard Business School, Stanford GSB, Chicago Booth, and other top programs, searching is no longer reserved for the elite. With the current abundance of dry powder in private equity, and an increasing number of business owners reaching retirement age, good deals rarely go unfunded.

Post a question, deal, job, etc...

Make a post...

Complete registration to post.

by a searcher from Southwest Texas State University
in Dallas, TX, USA

2yrs ago

How does inventory and backlog factor into valuation?

I’m looking at a deal where the rough EBITDA is <$1M
In an industry with 2-4x mulitiples. Seller is suggesting a valuation in the range of $10m due to having $9M in backlog and $6M in inventory.

How does BL and inventory factor into valuation calculation relative to SDE and/or EBITDA multiples?

Thanks!

Share

2 Likes

731 Views

Login to read all 23 comments

reply by a professional 2yrs ago
from The College of New Jersey in La Verne, CA 91750, USA

Late to the party here, but is this true backlog (work that has yet to be completed and revenue/expenses yet to be collected/incurred)? Or is it a service obligation where revenues have already been collected (i.e., deferred revenue in the accounting world)? Backlog has value if there's a benefit to be had from it. It reduces the risk associated with future revenue because it is already secured. However, poorly priced contracts can result in projects that are not profitable, which then begs the question of whether you really want to buy it.

Backlog doesn't always have value and oftentimes terminology gets mixed up. Aside from the above, backlog is finite and may not necessarily recur in the futureso paying a multiple on backlog would not make sense.

I agree with what has already been stated regarding inventory. We see lots of deals these days with big working capital adjustments because sellers held inventory on the books that wasn't going to turn.

reply by a searcher 2yrs ago
from University of Virginia in Burke, VA, USA

Much has been said already on the topic, but it's important to understand what the backlog actually includes - could all $9M of work start tomorrow? Often times the answer is no. If nothing new were added to the backlog, how long until the company would complete the $9M in work? These questions can help you get a sense of the sales cycle of the business, and you do want a business with a healthy backlog (which I assume is work they are actually contracted to perform, not just a pending sales pipeline). However, you're obviously going to value a company differently if $9M in backlog gets completed over 9 years vs over 1 year. For inventory...if he could make more money selling off the inventory than in selling the business, perhaps he should consider that route. Many have already commented on inventory valuation, but in the end the inventory is just a cog in the profit engine, which brings you back to looking at the company's financial statments.

More on Searchfunder