In recent months, we’ve received calls from many business owners considering selling their businesses. Their number one concern: how to get the maximum value for it, especially in light of today’s business market.
The initial steps, such as getting a professional business valuation, have not changed. However, have you considered what happens to inventory? Inventory is not often a first consideration, but in our experience it certainly should be. Inventory is part of the overall value of your business and is a prominent line item in the balance sheet.
Most business owners have invested years and countless sums of money into making a business successful. Naturally, the goal during a sale is to reap the most value. Here’s how reducing inventory can maximize the value of your business.
Why is Excessive Inventory Bad for Business?
The bottom line goal of any business is to turn a profit; 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.
One potential upside during the pandemic is that many businesses have lower inventory than ever before. While this may not be ideal for customers, it puts business owners planning an exit in a better position.
Why? There are some primary disadvantages of excess 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. Right now, most businesses are operating on leaner budgets. Thus, less inventory naturally helps cut costs.
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. At Alliant, we can help you with every aspect of selling a business and can help you liquidate your inventory before a sale.