Theoretically, inventory is part of the assets of a business and is normally included whenever sale of a business is contemplated. Exceptions could be when the new owner is aiming to completely change the line of business and does not need the goods in stock, which make up the inventory.
The Correct and Acceptable Method of Pricing Inventory
Inventory is stock in hand, and the buyer and seller would have to agree on the items at hand and the prices that are acceptable for these items. Sellers would try to value the items based on their retail prices, but this could lead to a skewed price of the inventory. Pricing inventory when selling a business needs the buyer and seller to agree on the methodology of the pricing before they enter into any negotiations. This could reduce disputes and quite likely narrow down the difference between the seller’s price and the buyer’s offer.
Once the amount of stock on the appointed day has been accepted by both parties, they then need to move on to giving it an accepted value. The right way to do this is to estimate the wholesale prices of the inventory items as this is something that can be backed up by documents and invoices. However it is likely that inventory items have been purchased at different dates and at different prices and this can lead to disputes. To get over this, the retail prices which would appear on the tags can be taken and some percentage agreed upon of relation of retail price to wholesale price. This can then be applied to the entire stock and valuation of inventory obtained as the price to be included in the sale.
Other Strategies for Inventory Valuation
One of the methods suggested by some business experts to get over the problem of pricing of inventory when selling a business is that the seller arrange for a clearance sale before he clinches the sale. This way the seller can recoup most of his costs as long as his sale prices are above the wholesale rates.
There could also be disputes on wholesale rates during a valuation, as the buyer can contend that the seller has not properly negotiated rates with a wholesaler. In such cases, trade associations should be approached to indicate correct valuations.
The profit and loss account of a business would have some indications on the value of items and can also be used to estimate value of inventory if acceptable to both buyer and seller.
Methods of inventory differ from business to business and can follow the first in last out method, the last in first out method, or the average cost method. If the buyer and seller can arrive at some consensus of the method to value the inventory, this could greatly reduce disputes. It is imperative for the seller to mention these terms clearly when he is preparing the documents for sale.
Pricing inventory when selling a business is only half the story. The seller and buyer still have to agree on the pricing of the business as a whole. This can be based on revenue and other assets and may quite often supersede inventory as a means of arriving at the price of sale for the business.