We have significant physical inventory but also strong service cash flows, and the buyer is blending the asset and income approaches in a way that undervalues us. How do we keep these methods separate?

Question

Tyler Smith · Accepted Answer

Buyers often try to blend different valuation methodologies to cherry-pick the lowest possible valuation for your business. When they try to mix the asset-based approach with an income approach, they often double-count your working capital requirements while ignoring the cash flow generated by those assets. Under IVS 105, these approaches must be kept distinct. The Capitalization of Earnings Method is designed to value the ongoing cash-generating power of the business, which inherently includes the assets required to produce that cash. To fight back, you must clearly separate your operating assets from your enterprise value. Show the buyer that your inventory is a necessary driver of your predictable, stable cash flows, not an independent pool of liquidation value to be discounted. Use your Accountability Chart to show that you have clear seats responsible for inventory optimization and supply chain management. Track your inventory turns on your weekly scorecard to prove operational efficiency. By demonstrating that your assets are highly optimized and fully integrated into your weekly operating cadence, you force the buyer to value the business based on its unified cash-generating power rather than treating your physical assets as a liability.