Buying and Selling Small Businesses: How to Do Inventory Montrose CO

Have you ever counted 3,546 small plastic insects?

I have.

One of my first sales as a business broker intermediary was a party store sold to a young couple by the retiring owner. Because the deal called for the buyers to purchase the inventory at cost, it was necessary to count every item in stock, whether in the retail area or in storage. Somehow, it fell to me to count the little plastic bugs—the kind that people use to frighten friends as a joke. What was frightening to me about it, was reaching the count of 3,437, wondering if I had not counted one of the green beetles, and thinking I might have to start over.

Fortunately, not every business buyer and seller are quite that exacting, but the story illustrates that the process of taking inventory is a serious matter to principals in the sale of a small business, and is, in fact, a critical part of completing the transaction successfully.

Here are some things you need to know, whether you are a buyer or a seller, about the inventory count for a small business sale, so you can complete this process successfully.

1. Part of the dollar value of the deal

In transactions that call for the held goods to be priced and purchased as part of the assets of the business, the final count is a necessary part of closing the escrow. If the sales agreement specifies a dollar value for the stationary property (such as furniture and fixtures), equipment and intangible assets, then there is invariably a second part of the transaction by which the buyer purchases the inventory that will be needed to conduct the business.

To avoid disagreement over what is and is not a fair part of the sale, buyers and sellers will often reach an accord about the anticipated value of the inventory when the deal is about to close. Without a solid agreement as to closing inventory value, the buyer may worry that there will be little or no inventory included, which means that he or she will have to shell out more cash than expected in order to open the doors. Meanwhile, the seller may worry that a buyer’s expectations are unrealistic, thinking the “included” inventory will be sufficient for six months’ worth of operations, while the seller had a lesser amount in mind.

For these reasons, principals are advised to reach agreement not only about the idea that inventory will be included in the price, but also, about the value of that inventory. After the final count, if there is more inventory or less inventory than was estimated, the closing price will be adjusted accordingly. In either event, the count is critical to completing a fair deal.

2. Accuracy is important

A general “guestimate” won’t do, as the buyer’s accountant will likely insist on an exact figure when setting up the books of the business. For the buyer to determine the net earnings performance of th...

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