How to handle inventory in an e-commerce business acquisition

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April 17, 2021

by a searcher from National Defense University in Santa Rosa Beach, FL 32459, USA

I'm targeting an e-commerce business with ~$6M revenue. Seller is currently both a wholesaler/distributor of a brand name product and he has a retail e-commerce site that sells the brand directly to consumers. These two components (wholesale and retail) have been operated as one business but he's selling the e-commerce site and holding onto the wholesale/distributor side. One of the challenges is that the seller didn't keep separate books for the retail e-commerce site. Revenue and most expenses were easy to break out, but the balance sheet was not. Determining net working capital will likely be a bit of a challenge and I'm not sure how I should propose to handle inventory. The seller indicates that he doesn't intend to include any inventory in the purchase price, which I understand is fairly common in the acquisition of a retail business acquisition but without a balance sheet to help calculate NWC, I am not sure if I should ask for a "normal" level of inventory to be included in the purchase price. Any thoughts on how to handle inventory in a situation like this? Thanks in advance.

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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
I am assuming P&L for retail e-commerce exists. First get comfortable with P&L (may be QoE as Lisa suggests). Now you know the COGS. Extract material COGS. Reverse the level of inventory by estimating inventory turns for the retail. That should give you approximate $ value of inventory. Also, often in e-commerce, the obsolete or slow-moving inventory is high. These you may want to let him keep and buy from him as you need. You do not want to, and very likely you cannot assume his A/P. b/c it will be impossible to split At the same time, if you buy the inventory, he keeps A/P, but he does not may off the A/P, then the vendor has recourse to you for the inventory you paid for. (You should look into if your COGS will go up due to smaller quantity buys).
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Reply by a professional
from Ohio University in Phoenix, AZ, USA
Prof Damodaran compiles a great list of industry average working capital levels, see http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/wcdata.html
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