Excess inventory can have detrimental effects on the sale of a small business. While the fear of running out of stock drives many owners to maintain high inventory levels, it can actually cost them money during the business sale process. In this blog post, we will explore the impact of excess inventory on business exits and discuss strategies to reduce inventory levels for a smoother and more profitable transition.

Understanding the Inventory Gambit

Inventory is no small player in the business sales game. In fact, it can make or break your deal. When you sell your business, you’re not just cashing in on goodwill. Your inventory and FF&E (Furniture, Fixtures & Equipment) come into play too. But here’s the kicker—the more inventory and FF&E involved in the sale, the less new cash is found in your pocket at closing.

Goodwill: The Golden Ticket

Buyers are lured by the promise of your business’s profitability track record and its potential for growth – it’s the stuff dreams are made of. But here’s the catch—excessive inventory restricts the amount of cash available to a new owner. And that directly impacts the goodwill component of the sale, unfortunately.

Real-Life Wake-Up Call: Can Too Much Inventory Stop a Sale?

Time for a reality check. Picture Johnny’s Sink Store, a successful small business swimming in a sea of inventory. Revenue? A respectable $5,000,000. Earnings? EBITDA is even $1,000,000. But hold on tight—here comes the shocker: $2.3 million worth of inventory and $300,000 tied up in FF&E. The result? A mere $900,000 goodwill component. That’s right, less than one year of earnings. Suddenly, liquidation sales and closed businesses don’t seem so far-fetched, do they?

Unveiling the Culprits: How Does Excess Inventory Accumulate?

Excess inventory doesn’t materialize out of thin air. Oh no, it’s a sneaky accumulation process. Blame it on lack of warehouse organization, incorrect demand forecasting, and shoddy inventory control. These villains tie up your working capital, clutter your precious warehouse space, and leave you with wasted products when demand takes a nosedive.

Breaking Free & Taming the Inventory Beast

Ready to battle the inventory beast head-on? Here are six strategies to reclaim control:

• Keep accurate inventory records as your shield
• Establish real-time reporting to stay ahead of the game
• Automate to streamline your inventory management
• Collaborate with suppliers, not clash with them
• Shrink supplier lead times and gain the upper hand
• Calculate safety stock based on customer service levels

You’ve discovered the secret weapon that can sabotage your business exit strategy: excess inventory. But fear not, armed with knowledge and strategies, you can tame the beast and secure a smoother, more lucrative transition. So, small business owners, let excess inventory be a thing of the past. Your successful exit awaits!

Remember, in the realm of business, surprises abound. And sometimes, it’s the underdog—like investing in a small business—that can deliver the remarkable returns you never saw coming. So why settle for the conventional options when you can take the road less travelled and make your mark? The choice is yours. Chat more to our brokers about how we can ensure your exit is smooth and profitable.