Navigating Challenges in Business Acquisition: A Case Study on Obsolete Inventory
Acquiring a small business can often feel like negotiating a high-stakes battle, as I recently experienced while exploring the purchase of an eCommerce firm. This particular business has demonstrated a solid performance, bringing in approximately $200,000 per year in Seller’s Discretionary Earnings (SDE), and was listed at $550,000, which included $100,000 worth of inventory. However, despite the initial enthusiasm, we encountered significant roadblocks during our discussions.
Upon thorough due diligence, I discovered that the company held $250,000 in inventory, a substantial portion of which—around $150,000—consists of very slow moving, obsolete, or verging on unusable products. The remaining $100,000 worth of inventory, on the other hand, turns over every 2-3 months, presenting no cause for concern.
In an effort to address the inventory issue, I proposed a consignment earn-out arrangement. Under this plan, I would purchase the outdated stock only as it sells, minimizing upfront costs and risks. Additionally, I intended to utilize a Third-Party Logistics (3PL) provider to closely monitor the inventory levels, allowing for transparent verification on a monthly basis. While I prepared to accommodate the cumbersome task of storing less viable products, my patience began to wear thin as the seller resisted any adjustments to her price expectations.
Despite my proposal to offer a total of $625,000—consisting of the full asking price for the business ($550,000) and a significantly discounted rate for the outdated inventory ($75,000)—the seller remained adamant. She flatly rejected my offer, insisting on a higher price of $680,000. At that point, it became clear that our views on the value of the obsolete inventory were dramatically misaligned. I perceived it as having a negligible worth, while she valued it at its original cost.
Ultimately, the negotiation came to a halt. It’s disappointing, considering the potential the business holds, but recognizing the disparity in our valuation perceptions is crucial. My hope is that a future buyer acknowledges the same inventory concerns and offers a more sustainable price point.
Reflecting on this experience, I invite readers to share their insights. Have you faced similar challenges in business acquisitions? What strategies have you employed to navigate negotiations involving outdated or slow-moving inventory? Your shared experiences and suggestions could undoubtedly provide valuable perspectives for anyone navigating the complexities of business
