NWC higher than EV - inventory and AR considerations

June 12, 2023

by a searcher from Texas A&M University in Austin, TX, USA

I'm at LOI on a business in the audio-visual industry. The business is 80% sales of high-end equipment, with much of that supported by installs at schools, studios, stadiums, businesses, and churches. Rentals are 10% of the business, and quite profitable.

$11m revenue, $1.2m EBITDA. EV is set on last 4y EBITDA, since retail sales are cyclical.

There are two key terms in the LOI:
1. A NWC capital peg, which we set from the most recent month's balance sheet. It's $3.1m, about 2/3 of which is inventory and 1/3 is A/R.
2. A provision to discount aged inventory to $0 -- no sales in the past 12 months.

The plan focuses on turning down NWC by 1/2 with stronger inventory and AR management. We'll also grow rentals and installs to improve margins I've got a business partner with significant experience in the install space.

Two questions:
1. What's the most efficient process for the aged inventory review? It'll be pretty involved because there are over 1,000 SKUs. I'd guess 1/3 of the inventory is aged, so I' expect at least 1 or 2 contentious conversations about inventory age.

2. Once the LOI is signed, we'll start reviewing contracts for A/Rs and determining how realistic it'll be to trim it by 1/2. Any lessons learned from trimming A/Rs? What's a gotcha we should be ready for?

Reply by a searcher
from Harvard University in New York, NY, USA

A/R trimming is a good long-term goal and some sellers are more lax than they should be. Other times A/R delay is part of the customer relationship process and hard to keep the customer at the same prices / win future work if you don't act like their bank. They see it as a package. You can definitely try both carrot (discounts) and stick approaches (stern calls / emails, finance fees), but I would suggest you expect it to take time if it can be substantially improved.

Reply by a searcher
from University of California, Berkeley in San Francisco, CA, USA

Mark, happy to offer my 2 cents. In short, there are assets appraisal firms for almost everything under the sun. #2 prob some low hanging fruits. I love rental pools and like your focus. Feel free to ping me.

+2 more replies.

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