Managing the inventory of your business is essential to maintaining its operations and growth. When you consider selling your business, you may put inventory management on the back burner.
Not properly managing inventory is one of the often overlooked tasks when planning for M&A. That discrepancy can lead to many problems when the time comes to sell your business. If you have too much inventory, then you will most likely lose money once you sell.
Extra Inventory Isn’t Smart When Selling YourBusiness
Middle-market companies typically sell for multiples of EBITDA, which are based on industry-specific determinants and growth prospects. Unfortunately, a disconnect commonly arises between the income statement of a business and balance sheets that are not managed well.Your inventory is one of your largest assets and ties up a good deal of capital.
A growing company obtains a line of credit from the bank and use that credit to purchase inventory. Many operations managers rationalize the idea of keeping extra inventory on hand as wise because it makes running a company smoother.Turnaround times increase, and more flexibility is gained in planning runs for production.
However, keeping extra inventory does not necessarily connect with a sales increase. This leads to declines in inventory performance. That realization hits you hard when you are planning to sell your business.
Managing Proper Control Over Inventory
On the surface, maintaining elevated inventory makes sense in the face of shifting customer demand. Your balance sheet should not reveal any anomalies in inventory when it comes time to sell.
Business planning should match your sales projections and inventory levels, but this level of strategical finesse requires a deep understanding of your company and how it operates with customers and suppliers. Investing in proper technology helps you to understand inventory consumption and plan accordingly.Along with conducting an annual inventory, at the minimum, you should also do a yearly business valuation to see where your company stands in the industry.
Understandably, buyers are not going to be willing to pay extra for extra inventory lying around. Many businesses do not realize how much loss they may incur due to the years acquiring elevated inventory. Unfortunately, no working capital adjustments will fix anomalies in your balance sheet for that degree of time. Say goodbye to your ability to negotiate for a high value.
Preventing Money Loss During a Sale
Do you normally leave money lying around? Well, if you have extra inventory, you are doing just that, and you need to get your“house” in order before you invite buyers to the table.
An inventory management program comes in handy for tracking your inventory and corresponding costs and data. Ideally, you should implement this at least a year in advance of selling your company.
Get in touch with M&A experts to conduct a business valuation and help you analyze your financial data. A buyer will likely not accept obsolete inventory, so you are tasked with efficiently disposing of it before you sell your business. Your M&A advisor can help you develop the most appropriate strategy for doing so.
Perhaps, you have already moved ahead with getting the word out that your business is on the market. Since an M&A transaction can take months to complete, you have some time to reduce your inventory to a more reasonable level, but you need to develop a strategy now not to lose money.
Not properly managing inventory on the balance sheet will lead to many problems when it comes time to sell. Take annual inventories, and keep the inventory number updated. These steps will give buyers comfort that the books are accurate.
Contact Sun Acquisitions today to take preventive measures to reduce your inventory, conduct a business valuation and make a plan of action to sell your business for its best value.