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The price of poor inventory management [case study]

WRITTEN BYJames Price | JPAbusiness

inventory management

A couple of years ago the JPAbusiness team facilitated the sale of a strong, independent business involved in import and distribution.

It was a well-known, independent brand that had been established for well over 50 years and had solid bottom-line performance.

Unfortunately, when it came time to exit the business it soon became apparent there was too much inventory (stock on hand).

We negotiated a price for the goodwill, plant and equipment etc, based on a multiple of Business Maintainable Earnings (BME), which is essentially the cash flow of the business. Then it was time to address the stock value.

Usually stock on hand is valued by way of a stocktake and its value is paid by the purchaser at completion. Ideally, its agreed value is the buy price the vendor paid for the stock at the time of the original purchase.

In this case there was considerable disagreement about the value of the stock on hand – a difference of 50%.

The buyer basically said: “You have X amount of stock, but a reasonable level of stock to run this business is Y. I don’t need X amount so I won’t pay for it. I will pay for Y.”

This disagreement hurt the vendor’s bottom line in two ways:

  1. It represented a large reduction in the value of the business on exit – several hundred thousand dollars;
  2. It meant the cash flow the owner had diverted to stock holdings over the years was lost – he couldn’t get that value back out.

This experience was a timely reminder to me: “Don’t forget to actively manage your inventory, because there’s big dollars to be won or lost there as a business owner.”

If you're considering a business exit or succession and need independent advice on business value and how your inventory and stock levels may be viewed by a purchasing party, contact the team at JPAbusiness on 02 6360 0360 or 02 9893 1803 for a confidential, obligation-free discussion.



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James Price 2018 smallJames Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.