Are you considering selling your business and looking for how to get the maximum value for it?
You are probably aware of initial steps, such as getting a professional business valuation, but have you considered what happens to your inventory? Inventory is not often thought of initially. BUT it should be. Inventory plays a key role in the value of your business and is a prominent line item in the balance sheet that determines the ultimate value of your business.
Since you have invested years of your life and countless sums of money into making your business successful, it is important to reap the most value from the sale of your company. For this reason, let’s discuss how reducing inventory can maximize the value of your business.
Why is Excessive Inventory Bad for Business?
When you are running a business, the goal, of course, is to make money. The more objective that you are at generating a profit, the stronger that your business will be. This means that you don’t invest in future profits or speculation but, instead, look at how to make money today.
While stocking a larger selection could theoretically appeal to customers who want access to options at their fingertips, too many options can also hurt sales by making customers confused or tie up your capital over a long horizon. In terms of the value of your business, and particularly if you decide to sell your business, inventory decisions can come back to haunt you. Here are some of the primary disadvantages of inventory.
Key Disadvantages of Excessive Inventory
Unless the suppliers are selling their goods on consignment, a business is stuck paying the bill for those products, regardless of whether they sell or not. And if they don’t sell, the products can deteriorate or become obsolete. This ties up capital and costs businesses additional surcharges in financing those products.
Most businesses are paying interest rates and face stiff penalties if they fail to make regular payments on the revolving credit line or business loan. Even when businesses are investing their own cash, this is money that is losing value from inflation that could be better invested elsewhere. Technology, renovations, targeted ads, and other investments may prove more lucrative.
While purchasing at volume wholesale, has cost advantages, there are ways that too much inventory, even purchased at a lower price, can hurt your bottom line. For example, if you are warehousing your products or are leasing additional space to store product, the rent and transportation of this additional inventory can subtract from overall cost savings.
The trade-offs between excessive inventory storage and bulk purchasing can be a difficult calculation due to a number of variables. That said, traditionally businesses that carry just enough products to meet their day-to-day demands out-perform the competition.
As they say, “The more that you have, the more that you have to take care of.” This proverb applies distinctly to inventory. Whether it is staff and equipment to manage and transport the inventory or all the time moving it around, tracking it, and putting it on display, costs for inventory management do add up. You may also have to spend more on advertising the products.
Always consult with qualified business brokers when selling a business. They can help you develop a strategic exit plan that doesn’t burden a new owner with frozen assets. Business brokers can help you with every aspect of selling a business and can help you liquidate your inventory before a sale.