Inventory And The Selling Price Of Your Business - Tips For Business Owner Sellers
Determining whether to include the value of a business’s inventory in the selling price or add the inventory’s value in addition to a business’s selling price is an issue that occasionally comes up when negotiating the purchase agreement during a small business transaction. While the answer depends on a number of factors that will be discussed, inventory is most often sold to the buyer in addition to the price of the business.
Most businesses, with the exception of service based businesses, have resale inventory that will be sold in addition to the price of the business itself. This does not, however, include the equipment or supplies needed to produce the inventory, which would be valued and included in the price of the business.
Retail businesses are great examples of businesses that carry a lot of their capital in inventory, and those that carry tens of thousands of dollars in inventory would sell that inventory to the buyer in addition to the business.
That is not true for all retail businesses, though, and some internet-based retail stores are the exception to that rule. In order to accurately decide if inventory should be included with a retail store, you must determine how much inventory is actually held at any time.
It is not uncommon for online retail stores to only order inventory as they are ordered by customers, meaning they do not hold large quantities of inventory in house for more than a few days. In this case, inventory, or lack thereof, would simply be included in the sales price of the business because it does not account for a significant part of the company’s value and is subject to constant change as the inventory is sold.
Restaurants are another example of businesses that will typically include sellable inventory (food) in the sales price of the restaurant as a gesture of goodwill if the amount of inventory is insignificant to the price of the business.
For example, a restaurant that is valued at $150,000 could include $3,000 of sellable food. The problem with including large amounts of inventory in the overall price of the business is that it over inflates the price of the business in the eyes of a buyer who is looking to purchase the business at a price determined as a multiple of earnings.
The question of whether inventory should be added to or included in the selling price of a business will largely be determined on a case by case basis and and solidified in a business’s buy/sell contract.