Very High Inventory > Revenue Share?

March 27, 2024

by a searcher from University of Pennsylvania - The Wharton School in Tucson, AZ, USA

Hello everyone,

I'm looking at a business that has about 2-3 years (!) worth of inventory on hand. Its a manufacturing business, and the product doesn't go bad. Leaving aside the obvious issue of accounting for it correctly before buying, does anyone have any suggestions on how to account for in the purchase?

I am considering offering some sort of revenue sharing on the old lot of inventory (something like 75% to the seller, 25% to me) to avoid having to pay for it as part of the purchase.

Has anyone done something like this before? I'd love some thoughts.

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

It is always a challenge to buy a business with high levels of inventory that exceeds normalized operations. In doing so you will have substantial capital tied up in inventory, and it can be hard to make the business cash flow with the additional debt burden. One thing we have seen clients do when there is excess inventory is to take that inventory on consignment. In essence you have possession of that inventory to sell it, but technically the seller still owns it. As you work through the inventory you pay the seller for that inventory. Typically you would pay them based on the original cost for that inventory. This also prevents the risk of you acquiring stale inventory that does not turn over quickly or might never turn over.

Happy to get on a call to discuss how this works. You can reach me here or directly at redacted Good luck.

Reply by a searcher
from University of Pennsylvania in Tucson, AZ, USA

Thanks Brad. That sounds like a very sensible plan that I could be comfortable with. This business has a LOT of SKUs, and I don't have granular data on the nature of which ones are in inventory. Seems like this would resolve that well. Thank you.

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