Valuing inventory when selling a company

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How Do I Value My Inventory?

The question of whether the value of inventory should be considered in a company valuation is a frequently discussed topic. Inventory is an important part of the business and significantly influences a company’s operational processes and financial health.

How can an inventory be valued? Three schools of thought:

1. The inventory is not valued separately

The company is valued based on sales or profit. Since the inventory is necessary to generate these sales or profits, it is not valued separately.

2. Separate valuation of the 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 the inventory that exceeds the normalized net value should be paid for in addition to the value of the company.

3. The inventory is a relevant asset

Here, the inventory is considered one of the central assets in the sale of a company and is valued separately.

What is the View of Buyers in Practice?

Buyers tend to have a conservative attitude when it comes to valuing the inventory. They prefer the first or second school of thought, especially if the inventory is not considered a main asset of the company. Buyers want to minimize the risk of paying for assets that may not deliver the expected value. However, in companies where the inventory accounts for 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 Valuation for a First Impression

If the value of your inventory is more or less constant and you would like to get a first impression of the value of your company, you can disregard your inventory. (we use this method for our online valuation).

Calculation Example for a Manufacturing Company


Here, the warehouse is not considered separately.

Example assumptions:

Revenue: 10,000,000
EBITDA: 2.500.000 applied multiple: 6.2 Calculation of Company Value:
EBITDA x Multiple = 2,500,000 x 6.2 = 15,500,000

The company value is 15,500,000

Fluctuating Value of the 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 valuing the company.

Calculation Example for a Manufacturing Company


The value of the inventory in this company fluctuates seasonally very strongly. At the time of the company valuation, it is 30% higher than the annual average.

Example assumptions:

Revenue: 10,000,000
EBITDA: 2.500.000 applied multiple: 6.2 Value of the inventory: 3.250.000 Ø Value of the inventory: 2.250.000 Difference: 750.000 Calculation of Company Value:
(EBITDA x Multiple) + Difference to ø = (2,500,000 x 6.2) + 750,000 = 16,250,000

The company value is 16,250,000

Comparison of Inventory Value and Company Value

If the value of the inventory exceeds the company value calculated using earnings, sales, or market method, you should choose an alternative valuation method, such as the asset-based approach.

Calculation Example for a Manufacturing Company


The value of the inventory is higher than the company value calculated using the Multiples Method.

Example assumptions:

Valuation without inventory 15,500,000
Inventory valuation: Raw materials: 10.000.000 Semi-finished products: 4.00.000 Finished products: 2.000.000 Total inventory value: 16.000.000

If the value of the inventory is higher than the company value calculated using the Multiples Method, a more in-depth analysis is definitely required to determine which method is most suitable in the specific case to determine a realistic company value.

These recommendations are intended to help entrepreneurs and buyers make an informed decision regarding the treatment of inventory value in company valuation.