An Inventory Valuer’s World
An interview with our expert inventory appraiser Thea Mills, as featured in Business Money.
Date November 2018
Thea Mills enters quickly with hand outstretched while balancing mobile phone, bundles of notes and an alarmingly large mug of coffee. I soon learn that this is the only way to be in the fast-paced, multi-tasking world of a Gordon Brothers inventory valuer.
The firm has been helping business owners and their lenders assess stock values for over a hundred years. By also having investment and asset disposal divisions, Gordon Brothers understands lending against stock from every angle. It now has a global presence with twenty-five offices on all five continents and leads the industry by the depth and quality of its reports.
The London-based Inventory Team covers the whole of Europe, South America and Australia as well as the UK, supported by a multi-lingual team of analysts, they are a globe-trotting bunch. Thea has enjoyed a great deal of travelling and contributes particular knowledge of Eastern Europe, having lived in St Petersburg for two years.
Liquid Asset Appreciation
Travelling around Europe sounds like it might be rather fun, I suggest, and Thea agrees. She enjoys exploring new areas on her morning runs and sampling local wines if possible. I check whether she does both at the same time, but apparently that would be taking multi-tasking a little too far. It anyway quickly becomes apparent that the clearest of heads is needed for appraisals.
Thea’s day job is to provide stakeholders with an accurate appraisal of a business’s stock. To understand the underlying worth of the goods, the appraisal needs to focus on what would happen to the inventory if the business was to cease trading. The key metric produced is a Gross Orderly Liquidation Value figure, which is essentially how many pence in the pound a company could expect to achieve in this gone-concern scenario. This in turn drives a Net Orderly Liquidation Value which factors in disposal and regulatory costs, which of course vary considerably from country to country, and sector to sector.
The hard work begins long before Thea sets eyes on the stock and although she’s the one catching the plane, it’s very much a team effort. As a first step, analysts back at base will start crunching numbers weeks in advance. They take a particularly keen interest in sales data and debtor reports to build up an all-round picture of how the stock moves. I brace myself for the word spreadsheet but when it comes, Thea is all smiles. Having previously spent ten years at Lloyds Commercial Finance - on the audit and credit side as well as being a client manager - she is actually a bit of a dab hand at them. By the time Thea has finished with it, a standardised spreadsheet will have been highly adapted to each appraisal.
Gordon Brothers has its historic roots in trade so takes a more exhaustive approach to analysing the stock itself than other appraisers by delving into product lines at the SKU level (stock keeping units). This gives a more accurate picture of stock and can unlock higher values and therefore higher credit lines.
Research into the industry and the market is also crucial and wherever necessary sector specialists are brought in. As the largest asset appraiser in the world - with £50bn+ of stock valued and £8bn disposed of every year - Gordon Brothers’ in-house expertise is formidable. Whether the stock is cheese, blood (didn’t ask, didn’t tell), steel or video games, they have never yet had to dial out.
The team will also get to grips with a company’s trading contracts and check how they relate to that country’s commercial law. Retention of title issues, for example, can be the difference between inventory having some or no value.
Once the prep is done the bags are packed. As Gordon Brothers continues to expand into new international markets, Thea can find herself almost continuously on the road for up to four weeks at a time. Alongside the appraisal work, duties can include business development, liaison with other European offices or, increasingly, assisting the firm’s investment arm. Her suitcase can therefore see black tie wear nestling uncomfortably against less glamorous safety gear.
Schedules are demanding. Annual reappraisals might be relatively predictable but reports on behalf of their clients are often required at very short notice. For M&As in particular, the window of opportunity opens and shuts quickly.
Although a Russian expert, Thea’s favourite work destination is Germany. The firm’s Cologne office is a joy to work with, the country has picture postcard villages and the wine is often outstanding. Our glasses of warm orange juice and lemonade begin to look even more forlorn.
Finding the physical stock is sometimes a challenge. GPS will only get a Gordon Brothers’ inventory appraiser so far and if the warehouse is in the far reaches of a messy industrial park then it can make for a difficult start to the day. But then, as Thea points out, location can anyway have a significant bearing on inventory values. She relates an example of construction materials being warehoused far from the beaten track. Although the stock was fine, the transport costs for such heavy goods over long distances would make realising their value too difficult in a three-month liquidation window.
More fundamentally, even the country in which the stock is located can have an adverse effect on appraisal outcomes. If Gordon Brothers can’t be confident that local liquidation laws and procedures give their client enough safeguards, the inventory value can be compromised.
On arriving, an experienced valuer will gather useful information from first impressions of the warehouse. Inappropriate stock levels, inadequate storage, poor systems or staff inefficiencies will necessarily have an impact on the inventory values, as well as reveal weaknesses about the management of the wider business.
And the wider business is something to which Gordon Brothers pays a lot of attention, especially if the stock is of a non-commoditised or specialist nature. Thea will gauge the quality of the management team in general, as well as entering into detailed discussions with them about their take-out strategy. By spending time with everyone from the FD to the warehouse crews, Thea will see how the company deals with its inventory from a strategic level down to its physical processing.
Businesses such as steelyards might have stock arrayed over a vast area, meaning appraisers have to cover a lot of ground in every sense. Thea, however, is less worried about the lengths she has to go to for a good appraisal than the heights she has to reach. Having a touch of vertigo means digging deep when using a cherry picker to inspect inventory on upper racks. However, she says, a properly random sample check is a very necessary part of the job, especially when dealing with expensive stock items.
Thea can often expect to spend at least a day on site checking stock. To protect its clients, Gordon Brothers has developed proven processes. Physical stock is reconciled with data previously supplied and the integrity of a company’s ledgers is rigorously tested. With this systematic and thorough approach, Thea has been able to detect sharp practices. She recalls an appraisal where her sample check indicated a significant shortfall in high-value stock, accounts systems were very opaque and the company’s accounts team members were constantly being moved around. Thea’s report allowed the lender to take swift and remedial action.
Happily, it is more often the case that their reports assist the inventory-holding companies and lenders. By identifying areas that need improvement an appraisal report can also make a trading business a better prospect for investment.
Thea talked through cases where valuations have been accompanied by advice on inventory management and assistance with disposal of ageing stock. This has led to leaner, more focused businesses which have then been able to secure better ABL lines.
Perhaps not all companies readily accept opinion on their own stock, I hazard. Thea concedes that there is a tendency for businesses to make easy assumptions about how easily their stock can be sold. Push-back on their inventory valuations is not unusual but there are inevitably difficulties and expenses in realising stock post-liquidation which fully-trading businesses have never needed to consider.
Gordon Brothers is, however, recognised as the appraisal firm which gives the most comprehensive and rounded reports on stock. The firm’s never-cut-corners philosophy means its inventory appraisal is always in the context of the business’s trading capabilities and the prevailing market. The firm’s reputation in the ABL world means lenders can place greater reliance on its reports. This in turn will often benefit the borrowing business as an authoritative report means a lender or investor can now be more assured in establishing or extending credit lines.
Appraising other industries is all fine, but where is the appraisal industry itself headed? Thea tells me it’s more relied upon than ever. Stock lending is on the up, while equity and private debt funds are coming into the market with fewer flying hours and sometimes no recession or liquidation battle scars. Using Gordon Brothers’ century-plus experience allows new balance sheet lenders, or lenders new to ABL, to enter the market with greater confidence.
Cherry pickers aside, the life of a Gordon Brothers inventory appraiser is a good one, I speculate. Thea is unhesitating. She enjoys the great team spirit across the European offices, the call on her people as well as analytical skills and how there’s always a next assignment to keep her on her toes. Ah, that’s my cue. I wish Thea well as she dashes off, perhaps as much to add value as to appraise it.