IBA Blog

  • Categories
  • Authors
  • Archives
  • Inventory Valuation

    Sep 30, 2014

    The valuation of the inventory and work in process in a mergers & acquisition transaction involving a manufacturing company is a sophisticated process.  The process requires experience, knowledge, and the business acumen to look at an individual component from cost and return on investment perspectives to determine what a “fair” valuation would be in the situation.   The valuation should incorporate materials, labor, overhead, liquidity, and the time value of money.   

    An interesting case example for conceptualizing the value of inventory in a manufacturing context is a winery.  A winery this time of year will have grapes on the vine awaiting harvest, raw materials at the winery (grapes & bottles), juice in tanks, wine in barrels, and wine in bottles.   The value of the raw materials will be their cost.  The value of juice in tanks will potentially include a load for labor & overhead above the cost of the raw materials.  The value of the wine in barrels will have a higher value than the juice fermenting in tanks.  Arguments can be made for including barrels in furniture, fixtures, and equipment or inventory.    The value of a barrel, a depreciating asset for a winery, starts with its cost, often including a load for shipping cost, and depreciates to the market value achievable when sold for a secondary use.  The value of the wine in bottles should incorporate the venue employed to sell the product.   Small production wineries selling direct to consumers will justify a higher transactional value for their bottled wine than wineries selling product through distributors or to large format retailers.  The governing concept when valuing inventory is can the purchaser make a reasonable profit when the inventory is sold given their acquisition cost, carrying expenses, and the liquidity of the product.

    The final valuation of inventory occurs in close proximity to the closing date for the transaction.  It is recommended in a professionally facilitated transaction to have a preliminary inventory value established and recognized by the parties early in the sale process.   It is common for the negotiation of value for inventory to be confrontational, as the seller wants a highest possible value and the buyer wants to avoid inheriting problems (e.g., a poor vintage with liquidity issues) or over paying from a return on investment perspective.   An experienced facilitator can serve as a trusted guide through the inventory valuation process minimizing confrontation and maintaining transactional goodwill.

    IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media and the mergers & acquisitions community on how to value inventory in a transactional context and any other subjects relevant to the purchase & sale of a business.

    Related Articles

    Conversation

    Leave a Comment

    Your email address will not be published.

    Leave a Reply

    Your email address will not be published.

    More Articles by this Author

    Recent Articles

    Should a Business Owner Grow Organically or Thru Acquisition?

    IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies…

    The Story of David Shinder (Pedag USA)

    American Dream Achieved IBA, as an approximately fifty-year old business brokerage firm serving the entrepreneurial community of the Pacific Northwest, has been uniquely positioned since before the American Bicentennial celebration of 1976 to witness and hear the stories of thousands of people who have lived the American dream through entrepreneurship creating beloved businesses by employees,…

    Afraid of Starting Your Own Business, Conquer Your Fear and Learn How To Take Risks 

    IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies…

    Contributing Authors

    Sign Up for Our Newsletter

    Popular Articles Delivered Directly to your inbox