How to value an online store that holds inventory

A profit multiple prices the earnings a business is expected to keep producing. Inventory is not earnings — it is an asset the seller already bought, and it turns into cash once, when it sells. Putting it inside the multiple counts it twice: once as the stock itself, and again as part of the profit that stock will help generate.

The cleaner way to talk about it is in two parts: a price for the business, set against comparable sales, and a separate amount for the stock that transfers at close, agreed on a count. Listings often describe this as a price "plus inventory". When they do not say, ask — the same headline figure means very different things depending on the answer. What a headline sale price includes takes several reported deals apart on exactly this point.

The stock you pay for should be the stock that exists on the day you take over, not the figure in a spreadsheet from last quarter. Agree in writing:

• When the count happens. Close to the handover, because the store keeps selling while the deal is negotiated.
• Who counts it, and where. A seller's own warehouse, a fulfilment service's report, a marketplace's stock dashboard — each is a different kind of evidence. A third-party report is easier to rely on than a seller's tally.
• The basis. Landed cost — what the seller paid to get the goods to where they are stored — is the usual starting point, not the retail price. Retail value includes the profit you are already paying for in the multiple.
• What happens to the difference. If the count at close differs from the estimate in the offer, the payment for stock moves with it.

Cost is a ceiling, not a value. Before agreeing to pay it, ask for a stock list by item with units on hand and units sold in each of the last twelve months, then look for:

• Slow and dead stock. Items that have not sold in months will tie up your cash and may only move at a discount. Divide units on hand by recent monthly sales; anything that would take far longer to clear than the rest is worth less than it cost.
• Seasonal or dated goods. Stock bought for a peak that has passed, or with a version, design or expiry date that makes it harder to sell next year. Valuing a seasonal online business covers buying around the calendar.
• Damaged, returned or unsellable units. Ask whether the count includes returns waiting to be inspected and items a fulfilment service has flagged.
• Stock in transit or on order. Goods already paid for but not yet arrived, and purchase orders the seller has committed to, need to be listed separately — who pays for each, and who receives it.

A buyer is entitled to pay less than cost for stock that will not sell at a normal margin, or to leave it out of the deal entirely. Agreeing which items are excluded before the count is easier than arguing about them afterwards.

The other mistake runs the opposite way: buying the business without enough stock to keep selling. Ask how long the current stock lasts at recent sales, how long it takes to reorder from each supplier, and how much cash a typical reorder ties up. If you will have to buy a large reorder in your first month, that cash is part of what the business really costs you, even though it appears nowhere in the price.

Supplier terms matter here too. Minimum order quantities, payment terms and the supplier's willingness to deal with a new owner are not always transferable. Confirm them with the supplier directly — transferring an online business after the sale covers the handover.

Stores that report profit on a cash basis can look more or less profitable in a year depending on when they bought stock. A year with a big purchase looks thin; a year spent selling down old stock looks rich, because the cost of what was sold was paid the year before. Ask whether the stated profit counts the cost of goods sold in the period or the cost of goods bought, and rebuild it if necessary. A seller who has been running stock down to make the profit look better is selling you an empty warehouse at a full multiple. How to verify a seller's revenue and profit walks through where the figures live.

Each ecommerce sale in our database records a sold price and, where the source stated them, one annual profit and one annual revenue figure. We do not record whether the sold price included stock, how much stock there was, or how it was valued — the sources rarely say. So we publish no "inventory adjustment", and the multiples below should be read as covering sales where stock may or may not have been part of the price.

Measured over the paid report's window — the most recent 200 priced ecommerce sales — on each basis, after the same trimming the report applies. Across every non-demo ecommerce sale with a stated profit (— of them), the median sold price was — the stated annual profit. A dash means we hold fewer than five comparables on that basis and publish nothing.

If the median sale sold for less than a year of its stated figure, that is worth knowing before you add stock on top: at those prices, the amount you pay for inventory can be as large as the amount you pay for the business, and the stock count deserves as much scrutiny as the profit. What is an ecommerce store worth? looks at why multiples in this category run where they do.