M&A Seller: Inventory

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“What can you possibly do to improve inventory in prep-for-sale?”

Manage the portfolio better… improve processes … train personnel … enforce procedures… aggressively follow procedures…

Does this sound familiar?  It will be the same goal for each asset and liability category.  Let’s examine what a potential buyer values.They are interested in the value of the existing inventory.  Perhaps it is valued on a LIFO or FIFO basis, but the balance sheet method selected matters only if it fairly represents today’s cost or marketstreet value – not a simple accounting definition for sure.

The buyer will be examining both the existing inventory, and the processes used to manage the asset.

They will be establishing a valuation based on what they see, and will consider:
·                         - The age of the inventory, and turnover characteristics
·                         - The condition of the inventory
·                         - Location of the inventory

                          - Processes used to manage inventory – is the inventory easily accessible?

As a buyer, they do not want your problems, but rather want to move quickly to convert the inventory to cash.  What is the inventory value of product that is 4 years old, in outdated packaging, stored in a remote warehouse?  If that inventory is usable as a replacement part, but only turns-over once per year, how will they value the inventory?  Although the part itself is first quality, but packaging is outdated, what is the value?

If you have a clean, easily accessible inventory, and you can demonstrate that through a personal tour, you will be viewed more favorably… aka – less business risk for the buyer.

Processes used are also an important element of value.  Once again, well-developed, properly implemented policies and procedures, managed by the right organization and systems, with properly trained personnel will increase value for the buyer. Make sure that policies are written and followed to achieve a full valuation. If each of these elements – policies & procedures, proper organization and well-trained employees – are in place for a reasonable time (… more than a year…) the buyer will understand that the management processes are both effective and stable. 

As an example, if you were to review a business that completely reorganized the logistics/warehousing function 30 days ago, what confidence level do you have in the process?

When you make changes in process, policy, organization or personnel, be sure to allow time to prove that the changes work. Or if they don’t work, be sure you have adequate time to implement change and prove that the changes are successful.  Be sure to consider all outsourced activity when you make changes. A change in a key logistics supplier may be risky if the change is not implemented and fully stabilized.

Overall, put yourself in the buyer’s role, and identify business risk when considering the final goal – fully, partially or not integrated.

Plan ahead to realize full value.