What about inventory in a business for sale

February 5, 2010

Yesterday I met with an attorney.  We were chatting about the sale of a business and the implications of inventory.

Imagine, it is the day before close, after a month or two of due diligence.  The demands of the buyer have been slightly on the nerves of the seller.  After all, did the buyer not realize the great value of this business?  The buyer feels like he had to slug through the due diligence and is tired, glad to see the end of the road, close.  The only remaining issue is the inventory.  It should be a snap. Right? Ha!

In a perfect world the inventory would be very current, all bought within the last six months perhaps.  The perpetual inventory, with current purchase prices that every business-for-sale owner wishes he had is in place and completely matches with the hand count.  There are only 1,000 items to count and they are neatly in place.  And, to enhance it all, the invoices with pricing matching the perpetual inventory records are right in the draw and all pricing is accurate.

May every buyer and seller have just this case and we are fit to close.

It does not always go that way.  Each of the perfect conditions represented in paragraph three can break down, even for the most perfect shop keeper.  The seller can help prevent an issue by having worked up to this day in cleaning out the old, spot checking the pricing if doing the entirety does no make sense, have invoices available, and ensuring the inventory is in order before the count begins.  It could take a year to get it all ready.  Start early.  For both buyer and seller, coming into the inventory count with a clearn, steam-free, and flexible mental state can help.

My attorney friend in paragraph one gave a great solution to old inventory.  In the buy / sell or purchase agreement, the seller can agree to take the old inventory (however defined) and have the non-compete exclude the seller’s divesting of that old inventory.  Short of this the inventory can be eliminated from the count or greatly devalued in the count as the business-for-sale close approaches the next day.

Some buyers and sellers agree to parameters for counting and valuing the inventory and then hiring a neutral party to actually perform the task.

My recommendation is that the inventory be done the day prior to the close, so the close and dispersement is not further delayed to have final numbers.

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