Much of a business’s value lies in the volume of its inventory. Inventory is so important because it is a significant generator of profit and total assets. At Pacific Business Brokers, we can guide you through this critical selling point in this video titled “Inventory and Business Value.”
Can all inventory be treated the same? When planning the sale of your business that may not always be the case.
Other than human capital, Inventory often can represent one of the most important assets of a business.
Depending on the type of business, whether raw material, work-in-progress or finished goods, as that inventory turns over, it could represent a primary source of revenue.
So how does that affect business value?
Beyond the ability to generate earnings, inventory is a key component in assessing required and normal levels of working capital of the business.
Carrying excess or potentially obsolete inventory can affect not only the cash flow of the business but the required working capital to run it, or the cash that is actually tied into the business.
When inventory turns well and according or better to industry standards, the business is considered to be efficiently using its working capital. Conversely, if much money is tied into inventory that does not turn as fast, then the business is deemed to be less efficient and could affect the perceived value by a potential purchaser.
Another variable here could be the condition or age or in essence salability of that inventory.
Additionally, inventory that is unsaleable, or not on the books, can negatively impact the value of a business.
An astute and qualified buyer will seek a solid understanding of the condition and levels of your inventory. They will want to see historical sales details and data on inventory turns to ensure that what they are purchasing as inventory is not stale or dead or slow moving and tying up working capital.
So in preparing the business for sale, inventory may not only be a substantial part of the value of the business, but can also be the anchor that is weighing you down.
At Pacific Business Brokers we can help guide you through this important component within the assessment of the most probable selling price of your business and provide valuable guidance to improve the value of your business through every facet including such an important one as the inventory.