Stock is the lifeblood of a business, but it can cause all sorts of problems when a company changes hands, mainly to the detriment of the buyer. Obviously, some types of businesses, such as garden services, do not have any stock and therefore don’t have these problems. The rule is always that stock is an extra amount to be counted and paid for on the days of the takeover of a business. Therefore, the selling price is X plus the value of the stock after stock-take has been completed. The stock value is at cost and the seller should provide invoices reflecting its purchase cost. Be wary if he states his mark-up is 100%. Take the selling price and divide by two to give the stock value.
You will probably find that he has inflated the selling price to give himself a better stock value. This is where a consultant who is experienced in that particular type of business will be able to advise you, especially as to whether the stock is old or obsolete. You do not want to pay for something unsaleable.
Other points which need to be considered:
- Are their suppliers stable?
- Do they carry sufficient stock and will you receive the same terms and conditions as the seller?
- Is the business under or overstocked?
- Can the stock be reduced without affecting the business so less capital is outlaid?
- Is any of the stock on consignment or items on lay-by?
You don’t want to discover that you have sold something you had no right to sell. On one occasion, we sold a CD outlet and although the CD’s being hired out were not stock in the true sense, the point is still the same. The buyer took over the business and paid the seller out for the 4 000 CD titles after stocktaking on the day of the takeover. Everything appeared perfectly normal until the buyer phoned us a few days later to complain that there seemed to be a lack of the most recent movies in the store. We found that though there were 4 000 CD titles, as required in terms of the sale agreement, the most recent titles were missing. The seller has another CD outlet and had gone back into the business after the stock-take and takeover and exchanged the most recent movies for older ones!
So be careful.
This is part of the series A-Z in Buying a Business by Mike Hindle of Affiliated Business Brokers