How should I prepare inventory and working-capital records before selling a distribution company?

By Michael D. Rubin, CEO & Founder · September 2026 · 843 words

Get your inventory counted, costed and aged by item, reconcile it to the general ledger every month, write down stock that will not sell, and build at least twelve months of monthly balance sheets so a buyer can see your normal level of working capital. Start six to twelve months before going to market, and earlier if your records are loose. In a distribution sale, inventory and working capital often move the final price more than the valuation multiple does, and they are a frequent source of price cuts late in due diligence.

Working capital here means receivables plus inventory minus payables: the money tied up in running the business from day to day.

Why these records decide the final number

Most distribution deals include a working capital peg, an agreed normal level of working capital the company must deliver at closing. Hand over more than the peg and the price usually goes up; less, and it goes down. The peg is normally based on an average of recent months, so the buyer needs monthly figures it can trust.

If your records are weak, the buyer sets the peg on its own assumptions, usually cautious ones, or asks to hold back part of the price until the numbers are proven. Clean records move that negotiation onto your ground. This is also one of the few parts of a sale an owner can improve without changing the business itself, only the records.

Inventory: the checklist

• A perpetual inventory system. Quantities and costs tracked in your software as goods come in and go out, not rebuilt from one yearly count.
• Regular physical counts. A full count, or cycle counts that cover every item over the year, reconciled to the system, with differences explained.
• Aging and turns by item or line. How long each item has been sitting, and how many times a year each line sells through.
• A reserve for obsolete and slow-moving stock. Write down, or set aside a reserve for, stock unlikely to sell at full price. Buyers will do this for you, usually more harshly.
• Consistent costing. One costing method, applied the same way every year. Your CPA chooses the method and approves any change.
• Consigned, drop-ship and customer-owned stock. Clearly separated so it is not counted as yours.
• Vendor rebates and freight. Recorded when earned rather than when the check arrives, so margins do not jump from month to month.

Receivables and payables: the checklist

• A monthly aging report of receivables, with bad debts written off rather than left sitting in the balance.
• Customer credits, returns and rebates recorded as they happen, not held until year end.
• A payables aging that shows you pay suppliers on normal terms. Stretching payables before a sale makes cash flow look better than it is, and buyers catch it.
• Accrued expenses, such as payroll, commissions and taxes owed, booked every month.
• A monthly balance sheet that ties to the bank statements and the general ledger.

Build the peg history yourself, before the buyer does

The simplest way to strengthen your position is to prepare the schedule the buyer will build anyway. Take the last twelve to twenty-four months of balance sheets, calculate working capital for each month, and note anything unusual: a large order stocked ahead of delivery, a customer that paid late, a seasonal build-up before your busy period. Seasonality matters a great deal in distribution, because a peg based on the wrong months can cost you at closing. When you can show a buyer the monthly pattern and explain each spike, the peg tends to be set on your figures rather than theirs.

Habits that cost distribution owners at closing

Buyers often commission a quality of earnings report, an outside accountant's independent check of your earnings and working capital. If your records hold up to that review, the price agreed in the letter of intent is far more likely to be the price you close at. See what causes a sale to fall apart in due diligence.

Several common habits look harmless until those accountants arrive:

• Building up inventory just before closing and expecting to be paid for it. Stock above the peg may not be bought at cost.
• Collecting receivables hard and cutting inventory to pull cash out before closing, which leaves working capital below the peg and the price lower.
• Keeping dead stock at full cost to protect profit on paper.
• Making adjustments only at year end, which leaves the monthly figures useless for setting the peg.

How we help with this

MDR & Associates' pre-exit consulting covers the 12 to 24 months before a sale, and for a distribution company inventory and working capital are among the first things we look at. We work alongside your CPA, who keeps the books and decides the accounting questions; our role is to show you what a buyer will test and how it affects the price. Our broader guide on preparing your business for sale covers the rest of the list. To see where you stand today, start with a free valuation snapshot.

Where this fitsSelling a distribution company in Texas →