| Too often then not, business owners and buyers | | | | company is sold to a strategic buyer and the |
| fail to think about the tiny details that are bound | | | | purchaser determines that they do not require |
| to arise when a business is sold. One of the most | | | | some of the inventory on hand. Some options |
| common areas where not enough attention is paid | | | | may be to sell the excess to a competitor but |
| until closer to the end is with respect to inventory. | | | | the buyer may not agree with that for strategic |
| This article will examine a few common inventory | | | | reasons, especially if the inventory is of a |
| issues that arise when a business is sold. | | | | sensitive nature. Sometimes a buyer or seller can |
| Valuation of the Inventory | | | | agree on a discounted valuation or perhaps finding |
| From an accounting perspective, inventory is | | | | another buyer for the excess stock that might |
| usually values in 2 common ways, LIFO or FIFO. | | | | not compete directly with the buyer, perhaps |
| From a business sales point of view, the parties | | | | from a foreign country or different industry. |
| must agree on the method of the count and this | | | | Old stock |
| may not be consistent with the accountant's | | | | In scenarios where some of the stock is aged but |
| methodology. | | | | still usable to some degree, a buyer and seller |
| The other issue that a buyer and seller must | | | | may agree on a reduced rate or perhaps the |
| agree on is work-in-progress (WIP). For instance, | | | | buyer can offer to purchase it on a consignment |
| in a manufacturing company, there may be | | | | basis, to mitigate some risk being assumed by |
| partially completed widgets in the production cycle. | | | | buying the old goods. |
| From a management accounting point of view a | | | | Financing inventory when a business is sold |
| company may allocate certain proportions of | | | | One of the challenges when a business is sold in |
| fixed overhead to determine a fully loaded figure | | | | Canada is how to get the inventory component |
| for WIP, but in a business sale a buyer may not | | | | financed by a financial institution. In Canada, |
| agree with the calculation. In a business sale, a | | | | lenders are quite conservative and it is especially |
| purchaser may argue the point that he should not | | | | difficult to get inventory financed during a change |
| be paying for a fixed overhead component for | | | | in control business acquisition. A seller may need |
| work-in-progress. Another factor to consider is | | | | to agree to get paid out over time or consider |
| simplicity. Both parties may be better served by | | | | selling on a consignment basis. The all cash deal |
| agreeing to a calculation that simplifies the work. | | | | for company inventory is not very typical any |
| An example may be to calculate a discount on | | | | longer. |
| wholesale value and use that as the WIP formula. | | | | If you are selling a manufacturing company or |
| The point is that business as usual calculations that | | | | similar business that carries a fair amount of |
| are taken for granted are up for negotiation | | | | inventory, work with a professional business |
| during the sale of a business. | | | | broker to lean how this deal point can be |
| Scenario where buyer does not want or need all | | | | structured. As always, consult with an attorney |
| of the inventory | | | | and professional accountant before buying or |
| Imagine a situation where a manufacturing | | | | selling a business. |