Industrial Materials & Inventory Asset Valuation

There are three types of liquidation buyers for finished goods: current customers, competitors, and residual opportunistic buyers.  Current customers will typically consider purchasing finished goods in a liquidation (normally at 10 to 30% off current selling prices) as they are familiar with the company and product quality and may have products on order and have a clear and established need for the inventory.  The discount level will be driven by the level of goods purchased, the reliance the customer has on the goods, the ability of the customer to source these good readily from another supplier or not, the quality and mix of the inventory on hand, and other factors.  Competitors typically seek higher discounts off of selling prices when purchasing finished goods in liquidation (usually seeking to pay 40-60% of inventory replacement costs) to mitigate risks related to purchasing goods in a liquidation, and to compensate them for any additional work or expense they may have to incur in order to market these goods, the time of value of money, and the cost of removal and shipment to their facility.  Residual opportunistic buyers will typically purchase inventory based on the intrinsic value of inventory sold through surplus channels, residual inventory value, or the scrap and/or salvage value of inventory. 

The primary buyers of raw materials are typically competitors of the subject company that buy similar products, suppliers of these types of materials, other operating businesses that utilize the materials, or brokers of similar materials.  Competitors are most interested raw materials in prime condition, good lot sizes, and reputable sources and they will likely consider current market or replacement prices as their first indicator of value.  For a manufacturer consuming the goods or a distributor, consumer, or broker of these identical goods, any small savings off their normal net procurement price, less an adjustment for their going outside of their normal procurement channels and liquidation related risk, may be enough to motivate them to purchase common and standard size and grade raw materials.  As the products get more specialized in any way, that level of discount will need to go up to incent the buyer to purchase something outside of their normal requirements or practices.  If the buyer is a secondary buyer who will be purchasing these goods speculatively with the intent to resell them, the discount will need to be significantly higher to compensate that buyer with a significant gross profit related tot the transaction, and the removal and holding costs they may incur in order to remarket the goods.  As a result, liquidation discounts on raw materials may be as low as 10% or less off current replacement costs for the most common commodity like items, or it may be significantly higher where remarketing time is high or unpredictable, functional or technological obsolescence is a factor, the purchase volumes are unusually high, and quality, condition, and or yield is a factor.  Secondary condition raw materials (small lots, opened containers, less reputable sources, etc.) will typically generate significantly less demand and may only get material scrap value or heavily discounted pricing on a salvage basis. 

Many manufacturers have a significant level of inventory in an in-process state in varying levels of completion.  The key factors to remember from a liquidation valuation perspective in relation to work-in-process remain consistent with other forms of inventory: who are the likely buyers, what and how much will the buy, and at what rate.  With work-in-process, the answer to the first part of that question is often: “no-one in its current state.”  When this condition exists often in order to consider the value of work-in-process collateral a conversion of that work-in-process may needs to be considered.  In these cases there are particular characteristics that should be considered in order to rationalize the valuation that inventory on a converted or completed basis.  The following condition must exist in order to consider a work-in-process conversion: 

• When an existing customer has ordered the product, actively wants it and will pay in advance for it.
• When there is a significant quantity of WIP on hand that is almost finished or where the cost/benefit ratio of finishing it is favorable.
• When the work-in-process is in a near-finished form, only needing simple packaging or light manufacturing (kitting or other non-intense and low expertise form of work) to complete.  (Remember that there is risk in anything so the projections need to be very favorable for a buildout.  If the buildout is only marginally more favorable that the as-is recovery, it should not be considered.)
• When there are no (or very few) additional supplies or materials required to finish the product.  (Remember it may be difficult to get additional supplies from the existing customer base)
• When the cost of additional items may be higher than normal due to the quantities required.
• When the lead-time to acquire additional supplies may extend your liquidation period and lower your net recovery.