Why is inventory not a plus-up?
Enterprise value on this site is cash-free, debt-free, and delivered at a normalized working-capital target. The multiple — SDE or adjusted EBITDA, size band × sub-sector — prices the going concern. The peg keeps the buyer from inheriting a stripped cupboard or the seller from stuffing the floor in month eleven.
Sellers like to say “plus inventory.” Buyers like to say “normalized working capital.” Both can be true only if inventory is counted before the multiple is applied. Adding book inventory on top of EV is double counting. Calling book inventory an add-back is how QoE starts a fight.
BizBuySell’s 2021–2025 manufacturing set shows median revenue about $1.13 million and median SDE about $268,321 (Source: Iconic recap). That is a working-capital-sensitive profile. A $180,000 obsolete raw pile on a 2.75x SDE file is not a rounding error. It is a cash-at-close event.
Larger files still obey the same rule. A $6.8 million-EBITDA specialty packaging converter in the $3–10M 5.5x–7.5x cell can lose more dollars on a bad peg than a Main Street shop has in entire enterprise value. Size does not make inventory a plus-up.
How should raw, WIP, and finished be aged?
Raw needs an excess-and-obsolete pass. Steel that missed a spec, resin that aged out, and electronics components that the customer’s design left behind are not assets. Electronics / EMS files carry this risk in a shorter clock than a metal fab that can still burn plate.
WIP is an asset only if the job can finish, ship, and collect. A traveler with 60% of hours and a dead purchase order is scrap with extra steps. Percentage-of-completion accounting can be honest. It can also hide jobs that will never invoice. ERP and job costing is where buyers extract won-job margin versus actual.
Finished goods that the customer already rejected are not assets. Finished goods built to a forecast with no release are a bet. Backlog and contracts decide whether that bet belongs in the CIM.
| Class | Keep in the peg when | Write down when |
|---|---|---|
| Raw | Turns, matches current BOM, no spec miss | Excess, obsolete, wrong alloy/resin, dead program |
| WIP | Job can ship and collect | Dead PO, failed first-article, unowned tooling |
| Finished | Released or contractually firm | Customer reject, forecast-only, expired lot |
| Customer-owned | Off the peg (not yours) | You booked it as yours anyway |
What is the working-capital peg in practice?
The research file’s habit is a trailing-12-month average of AR + inventory − AP, adjusted for E&O and non-recurring items, with a true-up after the physical. That is a broker rule-of-thumb, not a statute. Counsel will write the definition. Seasonal food / co-pack and building products files need a season-aware target. A single month-end snapshot is how people game the close.
IBBA Pulse Q1 2026 showed cash-at-close shares generally in the high-70s to high-80s percent by size band (Source: IBBA; the chart is visual — do not invent a single percentage). The residual is often note, earn-out, or escrow. The peg is how inventory avoids becoming a second note.
SBA 7(a) still caps at $5 million (Source: SBA). Lenders will ask whether inventory is eligible collateral and whether it is insured. That is a lending question. It does not restore obsolete raw to the peg.
How does job-cost WIP fail?
It fails when the system cannot tie hours and materials to a shippable job. QuickBooks plus a whiteboard can still run a good shop. It cannot defend a $400,000 WIP number without a physical and a job-by-job review. Say so early. Diligence cost goes up. Trust goes down. The multiple cell does not automatically go down unless the mess signals process failure.
On-time delivery, scrap, and rework are the operating metrics that predict whether WIP is real. High scrap with rising WIP is a red flag. High past-due backlog with rising finished goods is another.
ISM August 2026 New Orders 53.7 and Backlog 51.8 (Source: ISM) are national climate. They do not value your WIP. They do remind you that a book-to-bill under 1.0 for several quarters can leave you with raw you no longer need.
What write-downs happen before the multiple?
Write-downs happen first. Then you pick the size-band × sub-sector cell. Then you apply the peg. Mixing those steps is how people “split the difference” into a number neither earnings nor assets can defend. If after write-downs the remaining iron-plus-NWC stack beats earnings, you are on the asset-floor page.
Customer-owned consignment should never have been on your books. Tooling ownership in plastics and tooling shops is a cousin of this problem: the steel in the rack may not be yours.
Fed G.17 utilization 76.0% (July 2026; Source: Fed G.17) can coincide with bloated raw bought on a prior shortage scare. Shortage buying is not a valuation method. Age it.
Sellers: sell my manufacturing business. Buyers: buy a manufacturing business. The valuation pillar keeps the earnings table. Jason Taken is a business broker, not an inventory appraiser. Educational information only. Not tax, legal, or accounting advice. No value is guaranteed.
How to run a physical that a peg can survive
Freeze receipts and issues. Count by location. Age by last movement and by BOM currency. Tag customer-owned consignment with the customer’s name. Photograph the reject rack. Reconcile to the ERP before anyone talks multiple.
A physical done after the LOI by people who also pack orders will be sloppy. Budget time. Budget an outside counter if the dollars are large. ERP diligence should tell you whether cycle counts have ever been real.
Percentage-of-completion jobs should be listed with percent complete, remaining hours, remaining material, and a ship date that the customer still owns. If the PO is dead, the percent is theater.
Sector-specific inventory traps
Food: lots, allergens, shelf life. Electronics: last-time buys and customer-owned reels. Plastics: colorant and obsolete resin. Chemicals: expired drums and formula-specific intermediates. Building products: seasonality and job-site returns.
Each trap is a write-down rule, not a new multiple. The food hub and electronics hub exist so you ask the right aging question.
Peg fights that are really earnings fights
If the shop has stuffed finished goods every December for three years, the trailing-12 average is already generous. If the shop stripped the floor in the month before market, the average is a trap for the buyer. Either pattern should be disclosed. IBBA’s cash-at-close climate does not save a gamed peg.
True-up language should name the physical date, the E&O policy, and who counts. Silence is a second purchase price. Counsel writes it. The broker flags it.
How a physical should be frozen so the peg can survive exclusivity
Freeze receipts and issues. Count by location. Age by last movement and by BOM currency. Tag customer-owned consignment. Photograph the reject rack. Reconcile to the ERP before anyone talks multiple. A physical done by people who also pack orders will be sloppy. Budget an outside counter if the dollars are large.
Food lots, electronics last-time buys, obsolete resin, expired drums, and job-site returns are family-specific write-down rules, not new multiples. A December stuffing pattern makes a trailing-12 average generous. A pre-market strip makes it a trap. Name the physical date and the E&O policy in the true-up. Silence is a second purchase price.
A freeze protocol that keeps the peg from becoming a second price
Freeze receipts and issues. Count by location. Age by last movement and BOM currency. Tag customer-owned. Photograph rejects. Reconcile to the ERP before anyone talks multiple. Budget an outside counter if the dollars are large. Write family-specific write-down rules: lots and allergens, last-time buys, obsolete resin, expired drums, job-site returns. Name the physical date and the E&O policy in the true-up. December stuffing makes a trailing-12 average generous. A pre-market strip makes it a trap. Disclose the pattern. Counsel writes the definition. The broker flags the silence.
A closer read on freeze protocol
Freeze receipts and issues. Count by location. Age by last movement and BOM currency. Tag customer-owned. Photograph rejects. Reconcile to the ERP before anyone talks multiple. Budget an outside counter if the dollars are large. Write family-specific write-down rules. Name the physical date and the E&O policy in the true-up. December stuffing makes a trailing-12 average generous. A pre-market strip makes it a trap. Disclose the pattern. Counsel writes the definition. The broker flags the silence. Percentage-of-completion jobs need remaining hours, remaining material, and a ship date the customer still owns.
How a working-capital peg treats slow powder differently from live jobs
Enterprise value on this site is cash-free and debt-free with a normal working-capital peg. Inventory that will ship on released jobs in the next cycle belongs in that peg. Powder, resin, or bar that has not moved in fourteen months does not become extra enterprise value because the seller “paid for it.” It is a write-down or a scrap conversation. Treating it as a plus-up on the multiple is the usual inventory fight.
Customer-owned consignment should never hit the peg. Leftover safety stock the customer forgot should be identified before anyone counts it as the seller’s. Work-in-process that is past-due is often a stored broken promise, not an asset. Match the aged WIP extract to the on-time-delivery pack. If past-due and WIP rose together, you are valuing disappointment.
Physical versus perpetual variance is a quality-of-earnings issue. A shop that cannot find twenty percent of the powder the system claims will not defend the peg. Cabinets and whiteboards can still close on a Main Street CNC file if the physical is honest. They rarely survive a searcher on a two-million EBITDA file who needs the extract.
Do not invent a national inventory-turn benchmark. Write the family. A molder’s resin days are not a fabricator’s plate days. A food co-pack’s short-dated lots are a different clock again. The peg is a negotiation. The write-down is often not.