Question on how high raw material costs calculate into Multiple

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by a searcher from Sophia University
in The Woodlands, TX, USA

1yr ago

Question on how high raw material costs calculate into Multiple

Hi all,
I'm looking at acquiring a $4 mil business with an additional $1 mil inventory that is primarily Raw Material and about 15-20% WIP.
Seller wants to sell inventory at value as part of the sale, but in addition to the business price..

Curious, when calculating a multiple, do you all calculate both the numbers?
So.... $800k SDE on $5mil total, (making it a 6.25 X multiple)? Or is there some magical equation whereas multiples exclude the Inventories, making it a 5X ($800k on $5mil)?

Thanks in advance~ appreciate it!

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reply by an investor 1yr ago
from University of Utah in Austin, TX, USA

Agree with the Brads as well. Also understand that if you are financing any part of this deal, the inventory will be collateral against the note. The bank will also do their due diligence to make sure this has value so you should do your DD as well. And since this sounds like this is an asset deal (at least I hope it is with that amount of WIP/Inventory), unless the business has amazing growth rates, this multiple is probably high. However every deal is different.

reply by an intermediary 1yr ago
from The University of Chicago in Chicago, IL, USA

Is the $1 M inventory "additional" meaning it is over and above normal level of inventory? I presume normal inventory is included in $4 M price. I ask for clarity b/c recently I have run into a business that has "excess" inventory due to supply chain issues.
Even if $1 M did not exist, paying $4 M 5xSDE on $800 k is high.
Few other points that would change my response. What are sales and inventory for the last few years on financials? Is tax return inventory less that $1 M?