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Tags: deal structures, due diligence, inventory

Comments & Replies: 3     Views:     Post ID:     Comments About This Glossary Term

Another important aspect about inventory is whether it's included in the price and in addition to the price. And, is the broker's commission applied to the inventory as well as the rest of the assets. The typical answer is that the broker earns a commission on everything that is sold by the seller to the buyer, including the inventory. So if the seller has a different idea, the time to bring it up is before the marketing/listing agreement is signed.

Contributor: Business Broker, Northern California
Inventory is typically the component of a business that is held by the business to meet the buying needs of its customers. For example, a retail store that sells shoes has an inventory of shoes in different sizes, colors and designs to meet the needs of its customers. As California collects sales tax on goods sold, the distinction is important.

If a business has office supplies or fixtures, furniture and equipment to operate the business but these are not sold they are not inventory and are not subject to sales tax.

If a business is being sold and has inventory and over half of the value of the inventory is being sold, it must go through the Bulk sale process to notify creditors the goods are changing hands and that if they are owed money on those goods by the seller, to get that money from the seller as the buyer will not be liable.

The term "inventory" is commonly used in connection with large and small businesses and either as a noun or a verb. When used as a noun, inventory often refers to a company's stock of merchandise for sale. It also is used in connection with a stock of supplies used in a service, or parts used in manufacture.

On the shelves of a greeting card shop, or example, is an inventory of birthday, sympathy and other kinds of cards customers buy to offer various sentiments by mail. The company's inventory might include writing instruments, fancy stationary, and materials used when giving presents, such as gift boxes, wrapping paper and ribbons. Meanwhile, the auto dealer with rows of trucks, sedans and sports cars displayed on a large, brightly lit lot, refers to the vehicles for sale as inventory.

Inventory used in a service business may include cans of oil and selection of spark plugs needed to provide auto tune-ups and lubes. Or it can mean cleaning agents and supplies used by a janitorial service. The inventory stocked by manufacturers can be as small and low-cost as the feathers and shiny tin objects used to make fishing lures, or the engines, fuselage sections and instrumentation systems required in the assembly of large passenger jets.

When used as a verb, the term refers to the process of counting and establishing a value for these items of merchandise, parts or supplies. When the sale of a small business is about to be completed, the escrow holder may request that an "inventory" be conducted in order to determine the value of these items so the buyer can pay for them. It's one of the assets that will be purchased, along with the trade name, equipment and goodwill of the business.

One issue that often is raised in connection with a business sale is whether inventory is included in the price of the business. Transactions often are structured so the price includes all assets of the business, except the inventory. That's because the level of inventory can vary from day to day. A seller establishes an asking price without knowing how much inventory at wholesale cost, will be on the shelves on the day the transfer is concluded. So that amount is determined by conducting an inventory, calculating its wholesale value, and submitting that sum to the buyer for payment.

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