Wholesale/Distribution- How to make the numbers work with inventory

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August 17, 2022

by a searcher from The University of Michigan - Stephen M. Ross School of Business in Dallas, TX, USA

I recently came across a great wholesale company (~$750k Adj EBITDA) in a highly specialized industry. Stable revenue, recession proof(ish) industry, no customer concentration, exclusive product line, etc.

The owner wants to sell for a reasonable multiple (3.5x) plus inventory. The challenge with this business is that inventory is almost 2x EBITDA- which puts the total price paid at 5.5x on a stable, $750k business.

Any suggestions on how to structure a sale of inventory to make the numbers work?

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Reply by a searcher
from Institut d'Etudes Politiques de Paris (Sciences Po) in Dakar, Sénégal
It seems to me that when EBITDA multiple is used, it includes at least a normal level of working cap to continue operate the company (an analysis of past evolution of working cap and the right level of working cap for the industry should give the info).

In short the idea is to assess whether there is enough inventory at day 1 after acquisition to continue operating and maintain EBITDA without much additional financial investment.
If the working cap (inventory) is in the range of normal , the question, in my opinion, is whether you would buy this company at 5,5x its EBITDA.
If you assess it is in excess than the implied multiple is below 5,5x as you are having excess of inventory.
If you assess that the level is below normal level it means you will need to buy more inventory to maintain at least the current performances and ultimately paying over 5,5x.
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Reply by a searcher
from University of Tromsø in Dover, Delaware, USA
There would not be any business without the inventory, right? If we are playing the slicing game I would use this angle to approach it. Say you could lease the inventory or finance it some other way, what would be the cost of capital for the inventory? I would subtract that cost from the EBITDA. That would be a proper assessment of the business component that you are buying. If there is no EBITDA left after doing this, you are buying an unprofitable business where the real EBITDA of the business really is just a return on the capital the owner has left in the business.
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