Almost every improvement to EBITDA — earnings before interest, taxes, depreciation, and amortization — available to a private-equity-owned contract manufacturer costs something: headcount to run it, capital spending to enable it, or a hard conversation with a customer about price. Recovering obsolete inventory is the rare exception. The material has already been written down or fully reserved, so whatever you sell it for drops through at close to 100% margin. No new hires, no equipment, no renegotiation. And at the multiples contract manufacturers trade for, every recovered dollar of EBITDA is worth several dollars of enterprise value at exit.
The operating perspective here comes from the Ava team’s advisors, who include former contract-manufacturing CEOs and presidents.
Why are so many contract manufacturers PE-owned now?
Beauty and personal care contract manufacturing is a fragmented industry — thousands of independently owned manufacturers in the US alone — and fragmented industries attract consolidators. Private equity has been building roll-up platforms in the space for over a decade: several of the industry’s largest manufacturers are PE-built roll-up platforms, with a steady flow of smaller platform and add-on deals behind them.
The logic: a contract manufacturer (CM) gives an investor exposure to beauty-industry growth without betting on any single brand, customer relationships are sticky because formulas are hard to move, and small plants are cheaper per dollar of EBITDA than big platforms. Buy several, integrate, sell the platform at a higher multiple.
If you run or own one of these businesses, that context matters because everything below gets multiplied — first by the exit multiple, then by the number of plants in the portfolio.
What happens on the income statement when inventory is written off?
Our advisors, who have run contract manufacturing businesses, all point to the same sources of obsolete material: minimum order quantities (MOQs) that force you to buy 200 kg when the job needed 60 (the MOQ math is its own post), reformulations, discontinued SKUs (stock-keeping units), and shelf life expiring quietly on a rack.
Under US GAAP (generally accepted accounting principles), inventory is carried at the lower of cost or net realizable value. When material becomes obsolete, you write it down — the charge typically runs through cost of goods sold on the profit-and-loss (P&L) statement — and the part that matters: the written-down value becomes the new cost basis, permanently. GAAP prohibits reversing the write-down even if the market recovers. The loss is realized; the books have moved on.
This is why recovery is so clean. If you later sell material that was written down to zero, the cost of goods sold on that sale is zero. The proceeds — minus freight, handling, and any selling fees — flow through as gross margin and land in EBITDA. The income statement already took the pain in a prior period; the recovery is nearly all upside.
The write-off and the recovery are two halves of one transaction, usually separated by several quarters and, in most CMs, owned by nobody in between.
What is a recovered dollar worth at exit?
The exit multiple is what turns this from a rounding item into real money. Enterprise value (EV) — what a business sells for — is typically priced as a multiple of EBITDA, and contract manufacturers in the middle market are commonly valued at roughly 5–8x EBITDA depending on size and mix, and in beauty specifically, smaller CMs trade at mid-to-high single-digit multiples while large diversified platforms reach double digits.
The arithmetic every operating partner already runs in their head:
| Recovered EBITDA (annual) | EV at 5x | EV at 7x | EV at 9x |
|---|---|---|---|
| $100,000 | $500,000 | $700,000 | $900,000 |
| $250,000 | $1,250,000 | $1,750,000 | $2,250,000 |
| $500,000 | $2,500,000 | $3,500,000 | $4,500,000 |
| $1,000,000 | $5,000,000 | $7,000,000 | $9,000,000 |
To make the top row concrete: a CM sitting on $3M of written-off raw materials that recovers 12 cents on the dollar grosses $360,000; net of $60,000 in freight, handling, and fees, that is roughly $300,000 of EBITDA with no headcount and no capex. The recovery rate is illustrative, but consistent with what industry data and customer feedback suggest for distressed raw materials — cents on the dollar, not a fire-sale miracle.
One honest caveat: a one-time liquidation of a written-off pile is exactly the kind of gain a buyer’s quality-of-earnings (QofE) review adjusts out. The durable version is a repeatable recovery process that both monetizes aged material and shrinks future write-downs. A buyer can adjust out a gain; a lower run-rate obsolescence expense is harder to argue with.
Why does the portfolio effect matter?
For a PE firm that owns several CMs, this is not a one-plant fix. The write-off problem is structural — MOQs, reformulations, and shelf life exist at every plant — so the recovery playbook transfers across the portfolio with almost no adaptation. Four plants each recovering $150,000 a year is $600,000 of EBITDA; at 7x, that is $4.2M of enterprise value from a process that one person at the fund level can sponsor.
The portfolio also solves a matching problem no single plant can: one plant’s dead stock of a preservative may be another plant’s next purchase order, and beyond the portfolio there is a whole market of formulators buying the same INCI names (the standardized ingredient names used industry-wide) every week. The bottleneck is not demand for the material — it is that nobody connects the two sides, which is why most surplus listings go stale.
Why does nobody inside the building own this?
Here is the pattern industry conversations and customer feedback keep confirming: no contract manufacturer has headcount dedicated to excess inventory. Ops treats write-offs as the cost of doing business — a defensible view from an operations chair. Their job is to make product, on time, in spec. Chasing buyers for 80 kg of an orphaned surfactant is not in anyone’s job metrics, so it does not happen.
That is why this line item persists until finance claims it. The CFO is the only person in the building for whom the write-off is a recurring, visible, quantified loss — it is sitting right there in the reserve roll-forward. The full balance-sheet framing, with a deliberately conservative recovery model, is in Your Warehouse Is a Balance-Sheet Problem.
PE ownership sharpens the incentive. PE owners ask predictable questions, and “what is this worth at exit” comes early. A line item that converts sunk losses into enterprise value at zero incremental cost does not stay unowned for long once framed that way.
What are the honest limits?
Four things keep this from being free money:
Recovery rates are low. Distressed raw materials clear at cents on the dollar — 10 to 20 cents in decent cases, less for short-dated or niche material. Model conservatively.
It takes quarters, not weeks. Finding a buyer for a specific lot of a specific ingredient, with documentation and shelf life a buyer will accept, is slow work by phone and spreadsheet. Anyone promising fast liquidation of specialty chemistry is selling you something.
Most systems never flag excess until it is old. The transactional software running a plant — material requirements planning (MRP), warehouse management (WMS), and manufacturing execution (MES) systems — is built to make product, not to spot the moment a lot becomes excess. Material bought against an MOQ is almost never marked as surplus at receipt; it surfaces years later on an aging report with half its dating gone, and short dating is what forces fire-sale pricing. Flip the timing and the economics change: flag the excess the day it is created — buy, use what the job needs, list the remainder right away — and the same lot goes to market with maximum dating and time on your side instead of a deadline.
Documentation is the gate. Lots without certificates of analysis (CoAs), provenance, and honest date coding recover at steep discounts or not at all. The program starts with record-keeping, not selling.
None of that changes the core math; it means the right mental model is a steady, low-effort annuity, not a windfall.
Common questions
Will a buyer’s QofE just strip the recovery out of adjusted EBITDA?
A one-time liquidation gain, probably yes. A two-year track record of recoveries plus a visibly lower obsolescence reserve, much harder. Build the process, not the event.
We wrote the material down last year. Can we write it back up now that we have a buyer?
No. Under US GAAP the write-down is permanent. The economics show up as margin when you sell the material, not as a reversal.
What recovery rate should we model?
Model 10 to 20 cents on original cost, net of freight and handling, and treat anything above that as upside. The balance-sheet post walks through a conservative version.
Does this only work on inventory that is already written off?
No, but the P&L looks different. Selling aged-but-not-yet-reserved material near carrying cost produces little margin today; the payoff is the write-down you never take. Both belong in the same program.
Who should own the recovery program?
Finance. Ops has no incentive to chase it, and the loss already lives in finance’s numbers. One owner and a quarterly review of aged inventory is enough structure to start.
Ava On Hand is a demand-driven sourcing network for cosmetic ingredients, built to connect surplus raw materials with the formulators looking for them. We are pre-launch. If recovering value from obsolete inventory is on your list, you can request an invitation at avaonhand.com.