How to deal with Inventory Valuation When Providing a Small Business


It might be the most monotonous thing you do when buying as well as selling a small California small business for sale, but conducting inventory–counting out the items that are sold (in a retail store or distributorship) or used in running this company (such as food items in a restaurant or pieces in a manufacturing company)–is essential during due-diligence.

The commitment may call for inventory to be paid separately and follow the close of earnest. Or the arrangement might include inventory as part of the purchase price with the small business for sale. This part of the financial transaction often can’t be completed until the precise count has taken place.

And therefore calls for the admittedly tedious, hands-on process of viewing just about every item in stock as well as in supplies, checking on it has cost–using catalogs and distributor price sheets–then adding the knowledge to the inventory count.

Many sellers may recommend applying their computer-based inventory systems to look for the count of items and their prices. Still, in the buyer’s opinion, it’s worth the extra commitment to perform a physical matter. That’s because some of the products listed in stock, according to the catalog system, may be missing out on. It isn’t fair for a consumer to purchase “phantom” inventory. Aside from that, a physical check may well show that some of the goods have been on the shelves for a while, plus the actual cost to acquire these people would accurately be returned on older price bed sheets, rather than the higher costs returned in the current price database on my pc.

The Easter baskets getting dust in a corner on the stock room at the back of typically the gift shop, for example, ended up being purchased several years ago at price ranges that are lower than those stated for baskets that the retail store would acquire today. Plus, the inventory software used with the business may store merely current pricing unless it’s very sophisticated. If the consumer is to pay for inventory with cost, an effort should be created to establish the exact price purchased for each item by the retailer, not what that goods sell for today.

The moment of this count is usually relatively flexible. If the buy/sell commitment calls for inventory to be acquired in addition to the price, the earnest can be closed before the remaining inventory value is determined. Just as when the contract needs the price to include inventory, how the escrow cannot be completed before count and pricing processes are finished, and the entire dollar value of inventory comes to the escrow holder.


It’s excellent if the count is performed through the buyer and seller with each other. It allows them to start some of the training that usually is necessary for a business purchase contract. As they go over the items within the stock, the seller can get suggestions about where specific tools are sourced (identifying the vendor) and what is the best way for particular items to be sold (in a retail setting) or even used (if it’s a support business).

And when questions occur, as they invariably do, to value a particular item, who else better to agree on a fair value than the principles of the company transaction? How to price all those old Easter baskets–borrowing through the example noted above–in the actual absence of the original cost page is a question that can be resolved by having a bit of negotiating and bargaining. And it should be up to the purchaser and seller–the people who will be paying and receiving the cash with this inventory–to decide what is worth placing on it.

Even when the actual principals of a business purchase have difficulty agreeing on issues related to their transaction, they must be involved when it comes time to count numbers and price the stock. This procedure usually goes quite quickly and is relatively quick when the business is a foodstuff service. But in the case of any restaurant sale that I brokered some years ago, the products were quite a problematic laborious task. Because the buyer and retailer had taken a don’t like to one another, every part of the course of action became contentious when we acquired close to the completion of the escrow. Through inventory, the buyer insisted on counting the

toothpicks, proclaiming that he would not be “tricked by the seller” into getting more inventory than truly existed. And the seller, worried that the buyer might acquire something not paid for, needed that we weigh the salt along with sugar to determine an exact charge for these supplies. In this case, My spouse and I did the counting along with determining the values of good sellers’ cost sheets in the food suppliers. I was capable of completing the inventory in just a couple of hours. Still, it was a tight situation as I worked with watchful eyes involving both parties in the transaction. U repeatedly stopped what I ended up doing to ask them not to ever bicker over inconsequential troubles.


Don’t assume all business broker is as covered as I was, of course. As well as for those situations in which the events to the deal are not willing or unable to manage the actual inventory count themselves, it can relatively simple to hire inventory support when selling a business. These firms will send out an individual or perhaps a team–depending on the size of the actual job–to count out what to be tallied, look up their costs on the pricing resources provided by the seller, and produce the dollar totals required by the parties to the deal as well as an escrow. The cost for this support is usually based on a per-hour rate; from $150 to $300 is the range for many companies. A business broker or escrow holder can suggest a reliable inventory service. As well as failing, these companies are available in printed or Internet-based nearby business directories.

Whether the concepts in the transaction conduct the actual inventory or hire another service to manage the task, it is essential to remember that “inventory” applies not just to products held for reselling but also to parts and materials used in manufacturing and support businesses and to other kinds of materials. The olive oil used in the restaurant, powdered cleanser required to keep floors clean, and ink cartridges used in the actual printer are samples of the actual kinds of supplies that should be integrated for the parties to have a “fair” count.

If done correctly, then the inventory is an opportunity for the buyer to learn about the business and complete the organization’s transfer with an accurate and relatively priced count of the services and materials needed to operate this.

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