The following are a list of suggestions on how to value a business’s inventory:
– You and the seller will first need to agree on which method to use for the evaluation of the inventory. There are typically two types of evaluation methods. The first is to use the vendor’s invoice or some other documentation to determine the original purchase price. A warning when using this method, the original price may not reflect the current value of the inventory. To avoid this pitfall, use the second method where the current value is used.
– When should you do the evaluation and final inventory count? This step should be completed at the close of the business sale, as the inventory will likely fluctuate during the process of getting to the sale closing.
– When negotiations begin between a prospective buyer and the seller, there should be an estimated inventory value that will just need to be adjusted at closing. This is a crucial aspect of the purchase process if you wish to avoid major disagreements, and as a buyer you want to be sure you will have the necessary inventory to take over operations of the business.
– What counts as inventory? Ask your business broker for specifics, but typically something counts as inventory if it can be used or sold as a material or product for a customer. This does not include furnishings or equipment.
– A word to the wise, do not trust inventory software programs, get in there and do an actual physical count. This will lessen the risk of discrepancies within the actual inventory.
– While completing the inventory, you can simultaneously do a condition and quality check of the inventory. This can be useful for determining which items you will be able to sell and which, if they are no longer in demand or not compatible with your business plan, you may be able to negotiate for a lower value.
– If no issues have developed between the buyer and seller, then it may be a good idea to do all (or at least part) of the inventory together as it offers a unique opportunity to “pick the brain” of the owner for additional inside information about the business.
– Another option is to bring in an outside service to conduct the inventory for you. This is a good idea if you and the seller are not getting along well, as it limits the amount of time you have to spend together. This is also a great option if you do not have the time to conduct the inventory yourself.
The evaluation of the inventory is a very important part of the business buying process. The only way to make sure you get fair value for the inventory is by conducting the inventory yourself, or at least by having a qualified and trustworthy person do it for you.