Editor’s note: This post was orginally published in July 2019 and has been completely revamped and updated in June 2022 for accuracy and comprehensiveness.
This is a guest post by contributor Marla DiCarlo. It outlines how inventory and its value should be approached in any company which handles stock. The business depends on keeping detailed information about the inventory costs. Without that information, you won’t be able to sell your business if you have inventory.
One of the steps to selling a business that handles physical goods is valuing the inventory. This has the potential to become quite a contentious issue. The seller and buyer do not always agree on the inventory count or value. Therefore, it will prove difficult to reach an agreement on the business’ sale price. Though it will be challenging to accurately value the entirety of your company’s inventory, it is possible. Let’s take a quick look at how to value inventory during the steps of selling a business.
1. Tabulate the Inventory Cost
The first step to accurately gauge the value of your inventory is to determine the price of your inventory. You should do it based on what you paid for those items or spent to manufacture them. If you paid varying costs for different items in your inventory, you need to know all this information in detail. It doesn’t matter if you bought the items in bulk or individually. It also doesn’t matter if they were made at varying costs at your manufacturing facility. You must determine the true cost of the entirety of the inventory. You should do it based on what it cost to acquire or make those items.
2. Calculate the Inventory Sale Price at Current Rates
You can also estimate the value of your inventory based on the sale of each item at its current price. As an example, let’s say a company sells widgets for $25 a piece. They would have an inventory value of $2,500 for 100 units stocked in inventory. The sale price of your inventory will prove critically important to those interested in placing a bid. Such a sale price can be determined at today’s rates. It could also be determined by the rates you typically sell at.
3. Account for Goods That You Cannot Sell
You must subtract the value of unusable goods from your inventory’s retail value. As an example, consider a frozen fish supplier. That supplier has a power outage along with a generator failure that causes 100 servings of fish to spoil. If the retail value of each serving is $20, the supplier must subtract a total of $2,000 from the inventory value. However, the cost of inventory remains unchanged. Unusable goods affect the inventory’s retail value as opposed to what it cost to acquire or make the inventory. This is also information you need to maintain at any time and be easily retrievable. Hence why many businesses have software that keeps track of inventory.
4. Perform Ongoing Adjustments to Inventory Values
Inventory value is dynamic rather than static. The true value of your inventory hinges on current market rates. Business sale negotiations usually take place weeks or months prior to the current date. This means that they will be based on the inventory’s price at the point of those initial talks. Continue to adjust your inventory value as time progresses. The reason for this is to ensure they reflect the items’ true value at the current moment in time. Otherwise, there will likely be a disagreement as to what the actual inventory value really is when negotiations advance. Furthermore, you must adjust inventory value as you add new items and sell old ones.
5. Strive for a Mutually Beneficial Inventory Value
The inventory value must prove acceptable to the business buyer as well as the seller. In some cases, it makes sense to sell inventory separately from the company. The bottom line is there is no 100% foolproof means of tabulating the true value of inventory. There are multiple methods to calculate value. Discuss inventory valuation with the party interested in acquiring your business. This is an important part of the steps of selling a business. Then reach an agreement on a mutually beneficial inventory value. That way, both sides will feel as though they are getting a fair shake.
When valuing your inventory make sure to determine the price and calculate it at the current rates. Also, don’t forget to subtract all the unusable inventory that you cannot sell. As time goes on with the negotiations, adjust the value and try to strive for a beneficial value for both sides. Once you finish valuing the inventory, you can continue with the rest of the steps to selling your business.
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Marla DiCarlo is an accomplished business consultant with more than 28 years of professional accounting experience. As co-owner and CEO of Raincatcher, she helps business owners learn how to sell a business so they can get paid the maximum value for their company.
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