How to Properly Value Inventory When Selling a Business
| March 2022
Inventory is a special consideration for anyone looking to sell a business.
The items you have in stock may or may not contribute significant value to a potential buyer. It’s important to figure out whether this is the case, as it determines whether you should include inventory as part of the sale.
It’s crucial to count and calculate the value of your inventory properly. Doing so will ensure you won’t get taken advantage of, will strengthen your negotiating position, and can maximize your profits.
Consulting with an experienced business broker is the best way to go when seeking to valuate your inventory. They can help value it accurately, as well as guide you on how it relates to your business’s overall value and sale prospects.
Why the Sale of Inventory in a Business Sale Matters
Inventory is a key part of a company’s value. It comprises all hard assets you see a direct profit from every day — namely, all merchandise to be sold.
If there’s enough salable, high-quality inventory on hand, the new owner will benefit from taking it over completely as part of acquiring the business. If a significant amount of inventory is damaged or obsolete, the existing inventory might be useless to the new owner.
By counting the inventory and determining its value, taking into account both the cost of goods sold (COGS) and the projected retail value, a seller can get a sense of how marketable their business truly is. If you know the numbers and your inventory is clearly worth including in a deal, you’ll be able to share attractive inventory metrics with qualified buyers.
Counting and calculating inventory value beforehand can also give a seller confidence and leverage in negotiations.
How to Calculate Inventory Value for a Business Sale
Calculating the value of stock requires careful accounting of what you have on hand, the costs to obtain those items, projected sales, and adjustments based on a number of factors unique to your business and industry.
Physically Count the Number of Items
Counting the number of items in inventory is one of the first steps. According to some estimates, inventory is only counted accurately about 63% of the time, but you need to do better than this when planning to sell a business.
Counting can be done with the help of stock take and inventory management software platforms, but such software solutions might leave out items that are damaged, miscounted as a result of human error, or are missing due to theft.
For that reason, a physical count of your inventory is necessary for verification.
Sellers should conduct their own thorough count early on, and should expect buyers to do so as well on the advice of their accountants. Consider hiring a professional inventory counting service to verify your manual checks.
Calculate Wholesale, Manufacturing, and Development Costs
Next, calculate how much it cost to purchase the items you have in stock.
Depending on your accounting strategy, you might document average costs over a period of time, or actual amounts paid to obtain products and materials. In either case, the final number should exactly reflect what you paid to acquire those items.
If your business purchases raw materials that are assembled into salable merchandise, keep an account of manufacturing costs as well.
Calculate Your Retail Prices
Add up the prices you expect to sell all your items for. Calculate the number according to your current pricing schedule.
Make Subtractions and Other Adjustments
Subtract inventory that is damaged or out-of-date, or that you’ve discontinued sales for. Doing so lowers the retail value of your inventory but is important for portraying an accurate picture of the overall value of your stock.
You’ll also have to make adjustments as you procure new products and change your retail prices. Depending on the season or currently-used technologies and trends (in the case of consumer electronics and clothing retail, for example), your inventory may change and you’ll have to adjust calculations of value accordingly.
Staying up-to-date with accounting will help you decide how much inventory to include as part of a deal, and will keep you prepared for negotiations with your buyer.
A knowledgeable broker can help you through the process of counting stock — and when it comes to the sale of your business, make pivotal decisions on the sale of inventory.
How Much Inventory to Include When Selling the Business
When selling business inventory, the amount you’ll include will depend on whether it adds substantial value and enables the buyer to realize a quick return on investment. For example, a lot of stock that a new owner can sell easily and quickly is a great incentive.
If you still need to pay down debts, realize certain sales goals, or have another financial reason for holding on to your inventory, however, you may choose to hold back and not include inventory when selling your business.
Another consideration is whether the current stock reflects how your business is evolving. If the stock you currently have doesn’t fit how your business or your industry at large is changing, it may not make sense to offer it to buyers in negotiations.
Working with an experienced broker is the way to go. They will help you determine how much inventory, if any at all, you should offer to a buyer.
Work With a Raincatcher Broker
If you’re looking into selling business inventory, valuing your stock is an important matter. You’ll want to ensure the valuation is done accurately and know just how much inventory to include in your offering.
Talk to Raincatcher. Our brokers understand how to value inventory, how much of it to include in proposals to potential investors, and whether or not it will enhance your selling position and enable you to make substantially more money from the sale.
Have more questions about valuing your inventory?