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Is The Inventory Amount Added To The Selling Price? Or Is It Included In The Selling Price?

Comments & Replies: 8     Views: 2002     Posted By: Timothy Cunha JD  Timothy Cunha JD: Business Broker, SF Bay Area

Topics: Business Valuation, Selling A Business     Tags: business valuation, buying a business, inventory, selling a business

In most instances inventory is in addition to the purchase price. Especially with a retail business or any business with a fair amount of cash tied up into the inventory. The core value of the business doesn't change by the amount of inventory the business carries at any given moment. The business still produces a certain amount of profit, and it is the profit that drives the pricing. On businesses where inventory is nominal, it can be included in the purchase price.

Any business that is not a service business has resale inventory. When a business has a resale inventory (this does not include equipment or supplies) it changes the amount of capital that must be invested in the purchase of the business buy a buyer. Not only does a buyer have to buy the business, along with any goodwill but also they are being required to purchase the inventory that the seller holds.

It is common for a buyer to complain that they do not want to pay the same price/ earning ratios for a business with a substantial resale inventory as apposed to one where there is not. In truth inventory heavy business do not sell at the same price earning ratios. They must be sold for a lower price then a business making the same profit that do not need a substantial investment in inventory. This of course does not make sellers very happy, but there are options.

Here is four possible options: 1) The seller consigns the inventory to the buyer and it is paid for as it is sold. 2) The buyer pays below the seller s cost figure to justify the added investment. 3) The slow moving inventory is transferred at a zero cost and the current inventory is purchased at the sellers cost 4) The buyer refuses to buy the inventory, and purchases new, state of the art, inventory. In this scenario the seller is then forced to sell the inventory in a separate transaction. When you sell a large inventory, to another within the same industry, you usually sell it below your cost. In my opinion it is better to sell it to the buyer and be done with it.

I am seeing, while doing due diligence, how Internet based business are handling their inventory issues. I just looked at an on line clothing store doing over $100,000 per month in sales. A brick and mortar clothing store used to require a very large inventory but an on line store does not.

They 1) Order the merchandise in and then ship out the order within one week, keeping a very small amount of inventory or none at all. 2) They have a fulfillment house ship it directly or they have the manufacturer drop ship each order directly to the customer, again requiring no inventory.

It depends on the size of the inventory relative to the acquisition typically for my firm. A restaurant being sold for $125k with $2,500.00 in salable inventory/food typically thrown in.

A retail store purchased for $40k with $90k in inventory on premise would be paid out in two stages, one step for the business, and then one step after Buyer and Seller sign off on the final inventory count the day before or day of closing (or after a 3rd party inventory Company performs their assessment).

Contributor: Business Broker - Preschool Specialist

This all depends on how you are structuring your contract/purchase agreement. The question might be missing the most important point here. Everything should be as clear as crystal in your purchase agreement and totally straightforward.

If the agreed upon sales price is supposed to include the inventory, make sure it says that in the contract. It really hinges on the type of deal you have. But if you have a deal whose price is tied to the actual inventory, it seems that you will have to do a timely audit just before escrow closes to justify your numbers, and make sure the contract allows for adjustments in the final sales price if there are changes in inventory from the date of signing to the date of closing.

Good question. It does come up from time to time, particularly in negotiations over a buy/sell contract. If you were told by a broker that the inventory should be included in the price, you probably can guess what he or she was thinking. (Hint: the broker s commission is based on selling price). But for most businesses, the best idea is to price the business based on standard appraisal approaches, and then add in the inventory as an extra expense.

One main reason for this is that a buyer who is looking at the price as a multiple of earnings, will conclude that a business price that s inflated by including the inventory is simply not a good deal. For marketing purposes, it usually makes more sense to offer the moneymaking machine (the business) at a price that can be justified, and then selling separately, the actual stuff that goes through that machine.

There are a number of ways to structure the inventory part of a transaction, incidentally. Faster moving items might be purchased at cost at close of escrow and the items that don t move very well might be consigned to the buyer by the seller. Consignment items are not paid for by the new business owner until he or she sells them.

An exception of course is a business in which inventory is a very small part of the company s value and is subject to constant changes as orders are filled and things are then sold.

Some restaurant brokers recommend that their sellers include the inventory in the sale (and in the asking price). It s a gesture of goodwill that can set a productive tone for negotiations.

When I list a restaurant, the inventory is not included in the asking price. Since inventory can vary at close of escrow, I don t include the value of inventory in the asking price. My standard clause is inventory to be purchased by the Buyer at Seller s cost in addition to the Purchase Price and paid at close of escrow.

But since almost everything in real estate is negotiable, some buyers will want to include the value of the inventory in the purchase price. In that case sometimes a minimum amount is stated but most often it is just thrown in . The most common practice is to pay for inventory in addition to the purchase price. One more thing if an ABC license is included in the sale, the ABC wants all funds to go through escrow.

The practice I use is to estimate the inventory (on the high side) when funds are collected prior to sending in the ABC 226 form and then do an actual count the night before closing and adjust the number at close of escrow. When the Buyer fills out their ABC forms, there will be a line item for amount of inventory.

The handling of the inventory must addressed in the offer. Inventory can be included with a statement of acceptable level at time of closing or an actual count can be taken at closing and added. Typically, if the inventory is a significant portion of the sale the offer will read a price plus inventory.

The actual purchase of the inventory is an important part of the negotiation. The determination of how the value is arrived at should be determined and spelled out in the offer.

Contributor: Transactional Attorney

Inventory is typically added to the selling price. There are a wide range of ways it can be valued, and the amount of inventory a buyer agrees to purchase can vary from transaction to transaction as well.

If a business is carrying too much inventory given the average turn, a buyer may negotiate to purchase less of the existing inventory, for the seller to finance a portion of the inventory purchased, or for a reduction in the price of the inventory.

Buyers should ensure that inventory levels are appropriate for the business volume and seasonality, that all inventory is in good condition and usable/salable, and that they're paying for any inventory at cost or less.

  Helpful Resources To Assist In Selling And Buying California Businesses
William F. Ziprick, Attorney: Legal Services For Buyers And Sellers

Through creative problem solving, attention to detail, accessibility, & understanding that unnecessary delay is often a deal killer, I work closely with my clients and other professionals to consistently achieve a high rate of successful closings. Office: 909-255-8353, Cell: 509-951-7230.

Shalonda Chappel: Escrow & Bulk Sale Services - Southern California

Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.

Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Brad Steinberg, Business Broker: Laundromat Specialist

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.

Helen Yoo, New Century Escrow - Escrow Services In Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Janet Carrera: Escrow & Bulk Sale Service - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Elizabeth McGovern: Escrow Services - San Francisco Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

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