In our business asset sale contracts in Florida, for businesses with inventory, the inventory is normally included in the contract and is part of the final purchase price. There are often many questions that buyers and sellers have about the inventory, and we have taken the opportunity to highlight some of the common questions and challenges with inventory when it comes to selling a business.
Amount of Inventory Included
When a buyer is making a formal offer to purchase a business, the sale contract calls for an inventory amount. This is the dollar amount of what the inventory is worth. We find that listing this amount as a range (ex $9,000-$12,000), makes it much easier in the end, because inventory amounts can fluctuate in an operating business. The most important thing to do here is to make sure that you get this number or range directly from the seller at the time of the offer. We want this number to be as accurate as possible, to make the inventory count up at closing most closely match the number or range that is in the executed sales contract.
Inventory Value
The inventory amount noted in the contract would either be a) The original price paid by the seller for the inventory OR b) If it is "on sale" or not worth the original price paid, the inventory should be valued at its current MARKET VALUE, not what the original cost of the inventory was. The buyer won’t be willing to pay $5 for an inventory item if they could only sell it today for $1. So, sellers, please keep that in mind when running those numbers and giving your best estimate of an accurate inventory value.
Inventory Is “As-Is” At Time Of Closing
Contractually, all the seller is obligated to do is to include a certain dollar amount of inventory at closing (the amount or range agreed upon in the sales contract). The contract does not specifically state which inventory will be present, and the buyer is not at liberty to pick and choose which inventory they want or do not want. The buyer accepts the inventory present at the time of the inventory check before closing, and as long as the value adds up to the previously agreed upon value or range, then the seller has fulfilled their part of the contract.
Sellers Should Prepare For The Final Inventory Check
Sellers, it is important to do a preliminary count up well before the final inventory check with the buyer present, to ensure that you will actually be in the appropriate range. If you will be over that amount in inventory, then it makes sense to do what you see fit to get the number down. The reverse applies as well. If you have been holding back your orders because the closing is looming, and your inventory is well below the agreed-upon amount, then you need to either order more inventory or subtract the difference from the final purchase price. Changing the purchase price is very difficult to do the day before or the day of closing, so make sure you address this at least a week before closing if you know you will be short.
Final Inventory Check Before Closing
In a typical business sale with inventory, buyer and seller can elect to do an inventory count up the day of or the day before closing (ideally you want to be as close to closing as possible, to have the most accurate count up). Both parties get together to count up all of the inventory present that will be included as part of the sale. This can be done physically or done using the inventory tools on point of sale systems. How the count up is done will vary greatly from business to business, and it is ultimately up to the buyer and seller as to how they want to do it. Both parties need to agree on the amount of inventory present, and need to make sure it matches back up to the amount of inventory that was indicated in the original sales contract.
What Happens With A Discrepancy?
When things don’t add up at the final inventory check, then the buyer and seller will have to agree on what should be done, and what they decide to do will vary greatly from situation to situation. The best way to avoid this is by getting an accurate inventory number from the seller at the time of the offer and the seller being proactive about pre-checking their inventory prior to the final inventory check. All that needs to be there is the amount on the sales contract, so it’s really the seller’s job to make sure that it is there.
As always, we encourage both buyers and sellers to seek the advice of their respective attorneys during the course of a business sale. This article is meant to be experience-based practical advice, and in no way is it intended to be legal or financial advice.