How do I evaluate my warehouse?
The question of whether the value of inventory should be taken into account in a company valuation is a frequently discussed topic. The warehouse is an important part of the business and significantly influences the operational processes and financial health of a company.
How can a warehouse be valued? Three schools of thought:
1. The warehouse is not valued separately
The company is valued based on sales or profits. Since the inventory is necessary to generate this turnover or profit, it is not valued separately.
2. Separate valuation of inventory in case of surpluses
If the value of the inventory fluctuates seasonally or for other reasons, this must be taken into account in the valuation. This school of thought states that the portion of inventory that exceeds the normalized net value should be paid for in addition to the value of the company.
3. The warehouse is a relevant asset
Here, the inventory is considered one of the key assets when selling a company and is valued separately.
What is the buyers’ perspective in practice?
Buyers tend to have a more conservative attitude when it comes to valuing inventory. They prefer the first or second school of thought, especially if the inventory is not considered a key asset of the company. Buyers want to minimize the risk of paying for assets that may not deliver the expected value. However, for companies where inventory represents a significant portion of the total value, the third school of thought can be applied to ensure that all assets are appropriately valued.
Recommendations on the value of the inventory
Quick review for a first impression
If the value of your inventory is more or less constant and you want to get a first impression of the value of your company, you can ignore your inventory. (we use this method for our online evaluation ).
Calculation example for a manufacturing company
Here the warehouse is not considered separately.
For the calculation we make the following assumptions:
| Sales revenue | 10,000,000 |
| EBITDA | 2,500,000 |
| Applied multiple due to the influence of value drivers | 6.2 |
Calculation of company value:
Enterprise value = EBITDA × multiplier = 10,000,000 x 6.2 = 15,500,000
Fluctuating value of inventory
You should check whether the value of the inventory at the time of the company valuation is significantly higher or lower than the average. Unusual deviations should be taken into account when evaluating the company.
Calculation example for a manufacturing company
The value of the inventory in this company fluctuates greatly depending on the season. At the time of the company valuation, it is 30% higher than the annual average.
For the calculation we make the following assumptions:
| Sales revenue | 10,000,000 |
| EBITDA | 2,500,000 |
| Applied multiple due to the influence of value drivers | 6.2 |
| Current value of inventory | 3,250,000 |
| Average (monthly) value of inventory | 2,500,000 |
| difference | 750,000 |
Calculation of company value:
Enterprise value = (EBITDA × multiplier) + difference to average inventory value = (2,500,000 x 6.2) + 750,000 = 16,250,000
Comparison of inventory value and goodwill
If the value of the inventory exceeds the goodwill calculated using earnings, sales or the market method, you should choose an alternative valuation method , such as the net asset value method.
Calculation example for a manufacturing company
The value of the inventory is higher than the goodwill calculated using the multiple method.
For the calculation we make the following assumptions:
| Valuation according to the multiple method EBITDA x Multiple (see above) | 15,500,000 |
| Valuation of the warehouse | |
| Raw materials: 10,000 units of 1000 | 10,000,000 |
| Semi-finished products: 2,000 units of 2000 | 4,000,000 |
| Finished products: 500 units of 4000 | 2,000,000 |
| Total value of the inventory | 16,000,000 |
If the value of the inventory is higher than the goodwill calculated using the multiple method, an in-depth analysis is required to determine which method is most suitable in the specific case to determine a realistic goodwill.
These recommendations are intended to help business owners and buyers make an informed decision about the treatment of inventory value in business valuation.