BUYER’S VIEW OF INVENTORY

BUYER’S VIEW OF INVENTORY

How do buyers of businesses treat sellers’ inventory? It depends. If inventory is a significant asset, it is essential to any closing that both parties reach agreement on how to assess and calculate inventory amounts in the LOI.

Some calculations of working capital include inventory. Agreement should be based on a normal amount based on historical averages. Also, determine if a physical or sampling will occur, as well as whether the inventory is valued at cost, net realizable value or market value.

Inventory Manipulation – Before closing, both parties should address the possibility of an artificial increase or decrease in inventory. Useful protections include:

• No unusual inventory purchases or liquidation without disclosure

• No unusual discounts or sales made solely to affect the closing count

• Reconcile the physical count to the general ledger and inventory subledger

• Establish the cutoff for goods shipped, received, or in transit

If the Variance is Already Known – If you’re already in the middle of a business sale and have discovered a significant inventory variance, don’t simply negotiate an informal reduction. First determine the problem(s) and possible solution(s):

1. a physical shrinkage issue,
2. an accounting error,
3. obsolete/unsalable inventory,
4. inventory that belongs to someone else,
5. a cutoff/timing issue, or
6. a failure to meet the agreed target inventory.