Why should Inventory and Accounts Receivable be Part of the Purchase Price?
The standard procedure when a broker takes a listing, on a small main street business, can be with or without the inventory being included in the listing price. Including it actually presents a more honest picture, to the buyer, of what is required to buy and run the business. The reason it gives a better picture, with the inventory included, to a buyer, is because when the buyer looks at the net cash flow figure (SDE) and then compares it with the asking price, the buyer sees that it a high multiple. Let’s take an example. Net cash flow is $100,000. The price without inventory is $200,000 and with inventory is $300,000. The price is 2 x without inventory but 3 x with inventory. This might make the asking price look too high but in fact that is the real multiple.
Read the full article to find out why this is so important.