The following question came in via e-mail following The Credit Write-Up Again On-Line Classroom on March 2, 2010:

Q: While liquidation of business assets is not the primary source of repayment, I was interested why you elected to use a 60% advance rate on inventory?  While these assets would appear to be highly marketable, a lender would want to consider what legal limits would be placed on reselling alcohol, which I would assume would merit a lower inventory advance rate.

A: We selected an advance rate of 60% of Sacramento Distributors inventory for the following reasons:  The inventory is bottled goods with a fairly long shelf life.  There is no work in process or specialized finished goods that need to be supported by a company. Calistoga Water and various beers should be roughly worth their wholesale value in liquidation.  Of course, once word is out that the Bank owns the inventory, downward pressure would be exerted on the price since potential buyers know that the bank wants to liquidate its collateral as rapidly as possible.

To prevent dumping inventory below market value, I believe that some states have regulations that prohibit a debtor in possession from selling below a certain price. Your point is valid that alcohol may be subject to local laws and regulations.  Obviously liquor laws vary from one state to another, and so it would make sense to research the local statutes.  In this instance, I am not aware of any regulations that are placed on reselling alcohol to other distributors in Sacramento Distributors’ market.

Thanks for your thoughtful question