Recently peercomps.com posted a message about excess inventory – how does it influence the value of the business for sale. This is what they said and I agree:
Some of you have asked in response to our #1 FAQ about inventory,
how is “excess inventory” dealt with?
As mentioned in our previous post,
PeerComps “values” and “multiples” include normal inventory
and only excess inventory can be “added on” to a calculated value.
There are a number of reasons why there could be excess inventory.
For instance, a liquor store selling near the end of the year (higher inventory during holiday season).
Second, Bulk Buying.
Many business owners will take advantage of discounts
at various times of the year or discounts for buying large quantities.
So how do we calculate “excess inventory”?
One way is to look at industry averages, more specifically “inventory turns” or inventory as a % of sales.
Various databases such as RMA or Integra
give us some insight on what normal inventory is.
For seasonality purposes, you could obtain a month to month inventory count and take the average. Anything “above the average” could be considered excess inventory and added to the calculated value.