Advice on Inventory in Acquisition Deal? · Buy, Build, Sell ™ Businesses

Advice on Inventory in Acquisition Deal?

Hi Paul and all,

Can I trouble you for a bit of advice?

I’m currently negotiating the acquisition of a company with €3.5M in revenue. We’ve agreed on a price that includes €500K in inventory. However, due to the seasonal nature of the business, the inventory is expected to be significantly higher at the time of transfer. The current owner has always used the slower months to ramp up production ahead of the busy season.

How should this be handled?

My counsel suggests that the extra inventory should be considered stored production, and that no adjustment to the price is needed.
I take a more nuanced view. Given the seasonality of the business and the owner’s historically loose inventory management, I understand this buildup is meant to keep the factory busy year-round and ultimately leads to future revenue—which I’ll benefit from after the takeover.

I’m considering two possible approaches:

Limit surplus production before the transfer and spread payment for it at production cost—perhaps with a storage discount—over a year or more, to avoid straining cash flow or disrupting operations.
Offer the current owner a commission on the sale of this excess inventory, as it’s sold over the next year.

Would love to hear your take.

Best,

Philippe

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