When an entrepreneur thinks about the value of their company, the focus almost always goes to revenue, margins, EBITDA and growth prospects.

Much less often, the starting point is an apparently operational question: how much capital is tied up in inventory?

Yet, in the sale of an SME, inventory can have a significant impact on the real value of the transaction. Not only because it represents an important asset on the balance sheet, but because it says a lot about management quality, cash generation and the efficiency of the business model.

High stock levels, slow inventory rotation, difficult-to-value stock or poorly controlled working capital can become central elements in negotiations, up to the point of affecting the final price.

Why inventory affects value

For the entrepreneur, inventory is often seen as a form of protection. It helps serve customers quickly, avoid production stops, manage supplier delays and respond to peaks in demand.

For a buyer, however, inventory is also tied-up capital.

The question is not only: how much is the inventory worth? The more important question is: how much cash does this business model need in order to operate?

An SME may have good margins, but require a high level of stock to support production and sales. In this case, part of the value generated by the business remains locked in working capital and does not immediately turn into liquidity.

This changes the way the company is assessed. Generating profit is not enough. It is also necessary to understand how much cash is needed to generate that profit.

SME working capital: what a buyer looks at

In the sale of an SME, working capital is not analysed as an isolated accounting item. It is read as an indicator of the company’s management quality.

The elements most closely observed are:

• average stock level;
• inventory rotation;
• age of inventory;
• consistency between purchasing, production and sales;
• customer collection times;
• supplier payment terms;
• cash requirement needed to support growth.

A high level of inventory is not automatically a problem. It may be consistent with the sector, seasonality or the need to guarantee production continuity.

It becomes a critical issue when it is not explainable, not monitored or includes obsolete, slow-moving or hard-to-sell stock.

When stock becomes a risk

High stock levels can be interpreted in two opposite ways.

On one hand, they may indicate strong service capacity, supply chain control and attention to production continuity. In some sectors, a certain level of inventory is essential to operate properly.

On the other hand, they may signal weak planning, purchases not aligned with demand, slow-moving products or inefficiently tied-up capital.

The difference does not lie in the absolute number, but in the company’s ability to explain why that level of inventory is necessary.

During a negotiation, the buyer may ask:

• which products remain in stock for the longest time;
• which inventory items are linked to specific customers or orders;
• which materials risk becoming obsolete;
• how write-downs and adjustments are managed;
• how much inventory can actually be sold under normal conditions.

If these answers are not available, perceived risk increases. And when perceived risk increases, the price tends to be affected.

Working capital and price adjustment

In company sale transactions, the price does not depend only on the Enterprise Value agreed between the parties. A price adjustment mechanism linked to net working capital is often applied, meaning the normal level of operating resources required to run the company.

In simple terms, seller and buyer agree on the level of working capital that must be present at closing. If the actual level differs from the agreed level, the price may be adjusted.

This mechanism is designed to avoid a situation in which the buyer acquires a company that looks correct on paper, but is operationally weakened.

For example:

• if the seller reduces inventory too much before closing, the buyer will need to rebuild stock levels;
• if trade receivables increase abnormally, collection risk increases;
• if supplier payments have been delayed, the buyer will face higher cash outflows than normal.

For this reason, working capital in the sale of a company is not a technical detail. It is a relevant part of the negotiation.

The risk of unexplained inventory

One of the most frequent issues in SMEs is the limited readability of inventory.

The entrepreneur knows the internal logic well. They know which products will be sold, which materials are needed for future orders, which stock is precautionary and which items move more slowly.

The problem is that a buyer cannot rely only on the entrepreneur’s memory. Documentation is needed.

Readable inventory should make it possible to distinguish between:

• current stock;
• materials linked to orders or projects;
• finished products that can be sold;
• slow-moving inventory;
• obsolete inventory;
• strategic stock;
• items requiring write-downs.

The clearer this information is, the less room there is for disputes during due diligence.

How to prepare before the negotiation

An entrepreneur considering the sale of their company should analyse working capital before starting the process.

Not to temporarily improve the numbers, but to make the company more readable and defensible.

The most useful steps are:

• reconstruct the historical trend of working capital;
• analyse inventory rotation by category;
• identify slow-moving or obsolete stock;
• connect inventory, order backlog and revenue;
• document purchasing logic;
• explain the cash requirement needed to support the business.

This work makes it possible to anticipate many questions that will arise during due diligence and reduces the risk that inventory becomes a negotiation lever against the seller.

Working capital reflects the quality of the company

Working capital is not only a financial issue. It is a lens through which the buyer reads how the company works.

A company that manages inventory, collections and payments well communicates control, method and the ability to turn economic results into cash.

On the contrary, a profitable company with a high level of capital absorbed by working capital may appear less efficient, more fragile or harder to integrate.

For this reason, inventory should not be addressed at the end of the negotiation. It is part of how value is built.

Frequently asked questions about inventory and working capital in the sale of an SME

Does inventory always increase the value of an SME?

No. Inventory increases value only if it is consistent with the business model, sellable, documented and useful for operational continuity. If it includes slow-moving, obsolete or difficult-to-explain stock, it can reduce the value perceived by the buyer.

What is a working capital price adjustment?

A working capital price adjustment is a mechanism that adjusts the final price based on the level of inventory, trade receivables and operating payables present at closing. It ensures that the company is transferred with resources consistent with normal operations.

Why does obsolete inventory affect the negotiation?

Obsolete inventory affects the negotiation because it may not turn into future sales. For the buyer, it represents tied-up capital, write-down risk and a possible reduction in available cash after the acquisition.

When should working capital be analysed before a sale?

Working capital should be analysed before starting the sale process. Doing so in advance helps explain the company’s cash requirement, anticipate due diligence questions and better defend the price during negotiations.

Conclusion

In the sale of an SME, inventory can strengthen or weaken the value of the company.

Stock, rotation and working capital affect perceived risk, cash generation and price adjustment mechanisms.

Good margins are not enough if a significant part of liquidity remains locked in unexplained or hard-to-verify inventory.

Preparing a company for sale also means making clear how working capital supports the business.

Well-managed inventory is not just a balance sheet item. It is concrete evidence of the company’s industrial quality.