How to Conduct Inventory When Selling a Small Business

By: search rankpros

Inventory Issues When Buying Or Selling A Small Business - 7 Key Items

Have you ever counted 3,546 small plastic insects?

I have.

One of my first sales as a business broker years ago, involved a party store that was sold to a young couple by the long-time owner who wanted to retire. And since the deal called for the buyers to purchase the inventory at cost, it was necessary to count each and every item in stock--whether on display in the retail area at the front of the store, or in backroom storage.

Somehow, it fell to me to count the little items formed out of plastic to look like spiders and ugly bugs--the kind that people might purchase to frighten their friends as a joke.? What was frightening to me about it, was reaching the count of 3,437, wondering if I'd missed counting one of the green beetles, and thinking I might have to start over.

Here are some things you need to know, whether you are a buyer or a seller, about the inventory count that is conducted in connection with the sale of a small business, so you can complete this process successfully.

1. Part of the dollar value of the deal

In a transaction that calls for the goods that are held for resale to be priced and purchased in addition to the other assets of the business, the final count is a necessary part of closing the escrow. If the sales agreement pertaining to--as an example, a gift store or an auto parts company--specifies a dollar value for the stationery property (such as furniture and fixtures) and equipment, along with goodwill and other intangible assets, there invariably is a second and related part of the transaction by which the buyer purchases the inventory that will be needed to conduct the business.

2. Accuracy is important

And a general "guestimate" won't do, as the buyer's accountant is most likely going to insist on an exact figure, when setting up the books of the business, under its new ownership. For the buyer to determine how he, or she is doing in the first few months, it will be necessary to have accurate gross profit figures and, that translates to net earnings performance. It is difficult to make those calculations, however, without knowing the cost basis of starting inventory.

3. Physical count is needed

Actually counting the inventory is recommended, despite the assurance of some sellers that the "book" value of the inventory is accurate because of the inventory control software used in the business. Indeed, this technology is very useful. It maintains a count of inventory in its digital memory, and that inventory value can automatically be increased by the amount of the new goods brought in by suppliers--and logged into the computerized count, and decreased every time the scanner at the customer check-out station registers and item being sold-and in what quantity, so an appropriate deduction can be made in the computer.

4. Count everything

It is not just stock held for resale that needs to be counted and valued. Service companies which use materials and supplies, even restaurants that use quantities of eggs, hamburger patties and cola drinks, should be subject to a physical inventory prior to close of escrow.

5. Informal training opportunity

If buyer and seller have a good relationship, it is recommended that they conduct, together, at least part of the inventory count. That's because a review--and the ensuing discussions-- of the products being sold by, or used in the business, provide an opportunity for the buyer to begin getting educated about the business. Questions that will occur to the buyer during training, and subjects that the seller will want to explain at that time, can be covered while the two are engaged in counting and checking the pricing on items in inventory.

6. Splitting the difference

"Split the difference" is a handy phrase and a very useful concept to employ when conducting inventory. What should the buyer pay--actual cost or half-cost--for a product being counted which cannot be sold at full price, but still has a value to some customer? Split the difference.

How about an item that has been around for awhile--long enough that it's current cost is higher than what the seller actually paid many months back, off an old price list, when it was added to inventory? Split the difference.

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